These loans have virtually disappeared - the problem with doing a construction loan in a declining market is that when you get to the end of the construction period, your value may have decreased. A year or two ago, you could have counted on appreciation, or at least seeing the project to completion having maintained value.
With Fannie, Freddie and every lender left standing declaring various levels of decline in market value, and with the added expectation that it will continue for the unforseeable future, no-one wants to risk a six month or one year project with no idea of where the value will fall when it is finished. You and the bank could end up with a tremendous shortfall, and if you don't have the money to close, the bank has now built itself a spec house. Since most of them are practically real estate companies now, selling their foreclosures, they aren't going to go out and create a loan that has every indicator of going south.
So, postpone that dream house for a while, and look at all the new construction that is out there - and deeply discounted. It is a great time to buy a house, prices are depressed and interest rates are very low. It just isn't a good time to build a house.
I wish you the best in all you do.
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One Time Close - Construction AND Permanent Financing in One Loan |
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| The “One Time Close” (OTC) is a permanent loan product consisting of construction and permanent financing combined into one loan. This allows the borrower to reduce the expense of two closings in the building of their new home. Under traditional housing practices, the builder obtains construction or interim financing to build the home. When construction is complete, the purchaser of the home pays off the builder with a permanent end loan. As a result, the price the purchaser paid for that new home includes the interim financing cost incurred by the builder. |
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| Under the OTC program, the borrower takes out all the financing to build the home and the loan is closed prior to construction starting. The OTC loan is a construction and permanent loan in which the permanent house payments will not begin until the construction is completed. As a result, the lender will not set up or amortize the permanent loan in servicing until construction is complete. |
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| The loan is funded as the house is being built through construction draws to the contractor/builder. As the construction draws are funded, the borrower will pay interest only payments as the builder draws funds to build the home. Once the construction is complete and the loan is 100% funded, the lender will modify the Construction Rider into the permanent Note and the borrower’s house payments become a traditional mortgage loan transaction. This process can generate substantial savings to the borrower over the course of the home building process. |
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| NOTE: OTC transactions are NOT the same as a Construction to Permanent transaction. A true Construction to Permanent transaction occurs when a borrower converts an interim construction loan into a permanent mortgage. This is considered a "two time close" transaction. |
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| General Contractor/Builder |
- The loan is made to the Borrower. This allows the General Contractor/Builder to use their interim financing lines for other properties.
- The Borrower does not have to go through the credit approval process again when the home is completed, unless the program at modification is different than the program originally approved. This eliminates the danger of job/career changes, additional debt, or buyer’s remorse causing a potential "spec" home. Speculation is taken out of the project because the home is "pre-sold."
- Any interest charge that is usually calculated into the sales price of the home becomes profit.
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| Realtor |
The realtor's commission can be paid at closing, eliminating the wait until the construction is complete to be paid. |
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| Borrower |
- The loan is closed and ready for funding (draws) immediately by the lender. The Borrower communicates with the lender throughout the entire loan process.
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- The Borrower has the choice of using the FLOATING option or the LOCKED option for the construction term of the One Time Closing Loan program.
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- When using the FLOATING option, the Borrower chooses to float their permanent rate and their construction interest will be billed at a Prime based rate during construction.
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- When using the LOCKED option, the Borrower must lock their interest rate for the entire construction period and their construction interest will billed at the permanent interest rate. If the rate expires before the construction is completed, the loan must be re-locked.
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- Borrowers generally need not worry about going through the permanent loan credit approval process at the time the home is completed. This eliminates concerns of job/career changes or increasing debt.
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- EXCEPTION: If program at modification is different than program originally approved, then the loan must be reviewed for product eligibility.
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- Some fees for the construction portion of the loan and construction interest paid during the construction periods are tax deductible. Borrower should consult a tax professional.
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- The Borrower can finance up to 95% (program specifics apply).
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- As there is only one closing, the Borrower saves the costs associated with title and appraisal fees on a two time closing.
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- If the Borrower chooses, the loan can be paid down at the modification date to lower the payment or eliminate the Mortgage Insurance requirement. Adequate funds must be verified as per the product guidelines.
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