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Ground Up Construction Loans

When it comes to making one of life's largest and most important transactions, the goods better be exactly what you need.  Your home is far from just a vehicle for building wealth; it will serve as a place of shelter and comfort for years to come, with the potential to witness scores of your life's most previous moments and memories.  So if you can't find "the one" in the local housing market of your target area, you might just think of the prospect of making your own vision for a home into reality.  The one time close construction loan, which covers both construction costs and permanent financing in a single close, will help turn your blueprints into an inhabitable masterpiece.

Carpentry Work

The one time close construction loan, also known as the construction to permanent loan, is a ground-up construction program that eliminates the additional costs of doing multiple loans for construction and permanent financing separately.  You may also build upon a lot that you already own, provided that it meets the necessary standards to support a home.

Let's browse some of the highlights:

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  • Flexible Draw System For Construction Costs

  • Interest-Only Payments During Construction Phase

  • Can Lock Rate For Extended Periods of Time, Up to 18 Months

  • No Repeat of Approval Process - Less Time, Money, and Paperwork

 

This loan program simplifies an already intensive project: the creation of a home from scratch.  Most importantly, it significantly reduces the time it would have taken for you to step into your home with the keys.  Read more below on what you can expect with a one time close construction loan.

One Time Close Construction Loans

Minimum FICO Score: Program Dependent
Available Loan Terms: Varies, Usually 10-30 Years
Minimum Down Payment: Program Dependent
Maximum Rate/Term Refinance LTV: N/A
Maximum Cash Out Refinance LTV: N/A
Time From Bankruptcy: Program Dependent
Time From Foreclosure/Short Sale: Program Dependent
Mortgage Insurance (Y/N): Program Dependent
Eligible Use: Primary, Secondary, Investment
Eligible Properties: Residential 1-4 Unit Properties

Construction to permanent loans (CTP loans) are not necessarily standalone loan programs.  Rather, they are simply regular loan programs (FHA, VA, Conventional) with extended initial periods of interest-only payments to allow for construction.  The costs of construction are financed by the specialized portion of the CTP loan in the beginning, and upon completion, the loan converts to the permanent, long term mortgage program you selected at the beginning of the process. 

 

With this in mind, the process and qualifications for a CTP loan approval are very similar to those of the underlying permanent loan program you choose.  For example, if your CTP loan will convert to an FHA mortgage, you will need to qualify with FHA loan standards in mind.  However, the one time closing and lengthy construction process often results in CTP programs being more strict in down payment or credit requirements than the underlying program.

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The beginnings of a CTP process typically resembles the following scenario:  Two borrowers, let's call them Chandler and Ian, want to build a custom home on a lot being offered for sale.  After consulting with an architect and various qualified and experienced builders and contractors, they receive accurate and reliable cost estimates.  Upon scrutinizing their finances and deeming the cost within their comfort zone, Ian and Chandler apply for financing in the form of a CTP loan with a reliable lender.  Upon furnishing all required documentation and ensuring that their plans align with local building regulations, a loan approval greenlights them to purchase the lot and start paying their contractors in draws as various stages of the construction complete.

 

When applying for a CTP mortgage program, in addition to the documentation you must supply to be approved for the underlying permanent financing, you must also supply documentation related to your construction contract with the home builder you selected.  This information will inform the lender of crucial information, such as the deposit you have made, the building plans, estimated time until completion, estimated value after construction, and more.

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The interest rate of a CTP loan is often locked for long periods of time.  As the closing of the loan is done before construction commences, your final interest rate for your permanent financing can be locked as far as 18 months in advance, an incredible length of time compared to the standard rate lock of 30 days. 

 

This holds both benefits and drawbacks.  In rate environments that are trending upward, such an early rate lock will insulate you from interest rate hikes.  Indeed, individuals who locked and closed a CTP loan in late 2021 could have an interest rate that is almost 3% lower than the prevailing national average in late 2022.  Yet, there is very little recourse should interest rates decrease before construction completion, besides refinancing down the line (though some lenders may negotiate).

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Getting Prepped for Approval

Documentation requirements for CTP loans are very similar to the conventional loans and other government-backed loan programs they will eventually convert into.  There are a handful of additional documents that your lender will need, all regarding the details of your planned custom build.  


Though these prime loan products may be demanding with documentation, your subsequent airtight approval will qualify you for competitive financing options.  To see what documents you'll need for conventional loans, check out our prior to approval checklist page.

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