A construction to permanent financing is a fabulous choice for those looking to get funding for their dream house home building or commercial space construction. And whether you’re a first-time home buyer making your dream home or an experienced investor building up your rental stock, you must know exactly how this lending product works in order to come out with an informed decision. Construction to permanent loans make accessing construction financing with simultaneous long-term mortgage solutions really simple by merely using one coherent loan, and it is brought about by unique construction and structure of this loan product.

What’s a Construction-to-Permanent Loan?

A construction to permanent loan essentially enables a borrower to finance the construction of a property and its long-term mortgage through only one loan. These loans usually have two phases: the construction phase and the permanent financing phase. During the construction period, the borrower will only pay interest, while once the building is complete, the loan converts into a regular mortgage that is repaid over a given period, usually 15 or 30 years.

Unlike the scenario with conventional mortgages, where financing construction is dealt with separately with the mortgage loan, construction-to-permanent makes things easier due to the integration of the loan product for two stages. Therefore, the application and approval loan process will go through only one time, as the borrower has saved his time and energy. Once completion of construction is done, automatically the loan converts into a permanent mortgage; no refinancing is required for this purpose.

Benefits of Construction to Permanent Loans

Simplified financing process:

The best thing about construction-to-permanent loans is the convenience they offer. In general, obtaining a second mortgage after the construction is done always proves to be quite cumbersome and full of red tape. The borrowers need to undergo the application and underwriting process just once.

Lower Closing Costs:

The borrower is also saved the closing cost because there is only one loan to close rather than closing twice since that would have happened if one sought two different loans, one for the construction period and the other permanent financing. It thus saves closing costs.

Flexible interest:

Construction-to-permanent loans are likely to have their interest rates fixed. Borrowers can either choose for a fixed rate or an adjusted rate. Of course, everything depends on the preference of borrowers and how the market is doing. That is, either the fixed payment will be predictably monthly, otherwise, the latter might be attracted if the direction of interest changes over time for a decrease rather than an increment.

Avoiding Refinancing Trouble:

Many would not know that getting a traditional mortgage after construction has a whole new paperwork and processes in it. Sometimes, refinancing may take up a lot of time and comes with new risks which include rising interest rates or changes in credit scores. With construction to permanent loans, borrowers do not have to worry about refinancing because the loan automatically converts into a permanent mortgage.

Flexibility in payment:

The construction period requires the borrowers to make only interest-only payments. This helps borrowers not have to worry about making full mortgage payments at this stage and can help in their focus on the completion of the project. It will be highly useful for people with a tight budget during the building phase.

Construction to Permanent Loan Selection

Qualification:

A construction-to-permanent loan usually has harder qualification requirements compared to a mortgage. The lending company will require checking the credit score and income of a borrower, especially the financial standing to be ensured of being qualified for both costs: construction as well as permanent mortgage payments. This should thus be determined based on your finances.

Higher Interest Rates for the Construction Phase:

Permanent finance phase can have low rates; however, for the construction period, the rate is relatively high as that of a mortgage since one is lending for an incomplete project. Borrowers must prepare themselves to pay high-interest rates on construction.

Loan limits and lender policies:

There are some lenders that place a limit on the maximum amount that they will finance for a construction to permanent loan, especially when dealing with huge projects or properties requiring serious constructions. The customer needs to carry out research on the kind of information available for lenders in order to find out what their loan limits for funding specific projects are.