Conventional Mortgage Vs. Construction To Permanent

By Author: Michael Price
Total Articles: 114
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On a construction to perm loan, the loan is closed prior to any construction commencing. As the property is constructed, the builder (Janks Construction) will order inspections to be done by the lender. As he progresses, funds will be released to him from your loan to continue constructing. This is typically done with anywhere from 3 to 6 draws during the construction process. As funds are disbursed, you will be responsible to make interest only payments on the funds disbursed until the property is complete. Once complete the loan rolls into your permanent financing loan.

Your best weapon in the construction to permanent loan process is a loan officer at a reputable lender who has shepherded many home construction projects through from beginning to end. His job is to put together a strong loan application and then help you through the construction process.

The construction to permanent loan application requires the same documents as a conventional home mortgage, including bank statements, proof of income and tax returns. Other considerations include cash down payments, whether the borrowers already own the land, ...
... and the loan to value (LTV). It is difficult to get a 100% LTV construction to permanent loan. Interest rates may be fixed or may float until conversion to a permanent loan.

The second option, which I would recommend in this case, is to let the builder pay for the cost of construction. Put your 20% deposit on the contract down, (in escrow if possible), and let him use his money to build the home. You can still apply for a mortgage loan with your bank, and lock in an interest rate for a closing in May/June if that is your closing timeframe. Many lenders offer a lock with a float down, where you can lock the rate at application with the option to float down should rates drop further during the process. You can move through the application process with everything but the appraisal, and once the home is complete, have the appraisal done. At that point your loan is done to simply purchase the completed house and has nothing to do with construction. In this case, you will not have to pay any interest until you have bought the completed house and are the new owner.

A conventional mortgage allows a borrower to buy a completely constructed home. This type of a loan is usually a fixed rate, 30-year mortgage. A construction-to-permanent mortgage allows a borrower to construct his own home, with varying term and rate.

Significance
A construction-to-permanent is a type of construction loan that allows the borrower to fund his construction and his permanent closing with one closing.

Types
Each mortgage, a conventional or a construction-to-permanent mortgage, comes in fixed or variable rate types. Additionally, the term can range from 10 to 40 years.

Time Frame
Most construction-to-permanent mortgages require the borrower to complete the construction within a set time frame, from six months to one year.

Features
A construction-to-permanent mortgage allows a borrower to lock in the rate at the start of construction. This protects the borrower from rising interest rates.

Considerations
A conventional mortgage may not allow a borrower to construct the residence, however, it allows a borrower to move in immediately after closing.

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Janks Construction was founded 12 years ago by Steve Janks. Janks Construction has over 25 years experience in converting homes to dream homes in the San Diego area.