A construction-to-permanent loan is a type of loan which allows you to build or renovate your home. When the construction process is finished, the loan converts into a traditional mortgage without you having to go through another closing process.
During the construction phase, you’ll make interest-only payments, and your lender will schedule home inspections to track how the construction process is going.
Typically you will pay 7.75% interest on the balance of the loan or the loan amount. For example, let’s say the loan is $500,000, you will pay 7.75% on $50,000 (10%), then as more is drawn you will pay that percentage on the total. You pay interest only up until the construction is completed.
Once the construction is finished, your loan will convert into a permanent loan without additional closing costs. Then, you will be required to pay interest and principal each month. By securing both a construction and permanent loan at once, you can lock in the interest rate before the construction process begins. This helps to avoid potentially higher interest rates, saving you money in the long run.
For example, if interest rates have gone down by ¼% or more you will automatically get the lower interest rate. Or if the rates have gotten worse, you can keep your initial rate.
When it comes to the requirements associated with a construction-to-permanent loan, lenders typically face more significant risk with a construction loan than with a traditional mortgage. This is due to the unpredictable nature of the construction process.
To protect against possible issues that could arise, construction-to-permanent loans require you to have the following:
- A good builder, plus details of the build
- A good credit score
- An estimate on the expected home value
- A down payment of usually 20%
- Cash reserves to cover the cost of construction upfront
Understanding the requirements needed for obtaining a construction-to-permanent loan is crucial to knowing whether you will qualify for the loan when you are ready to build your dream home.
If you are interested in financing a new build, contact us today for more information on our construction-to-permanent loan options.