One Time Close Construction Loan

One time close, versus multiple closings. Which is best?

Building a new home is an exciting time, but there are two main options to a "new construction loan" and financing.

1. A pre-packaged model home in a typical development, where you can make minor changes. Builder carries the construction financing.
2. Building your own home, on your own lot, with you picking out every aspects. You carry the construction financing

The first option is easy. Put a small down payment, and close on a normal loan when the house is done. The second options is significantly more complicated. You technically need two loans. The "construction loan", and then the final long-term loan.

One of the decisions you’ll need to make is what kind of construction loan you should use to pay for your project: a one-time close loan or multiple loans?

Your Two Self Financed Construction Loan Options

Construction loans are intended for buying land and building or improving structures. They typically last only as long as it takes to build the home—about a year or less. Therefore, once construction is done, you'll need a way to transition to a longer-term loan, especially if you want the lower payments that would come with a 30-year mortgage. There are two ways to do this. 

One-time close construction loans allow you to get both loans (the construction loan and the permanent loan) at once. When construction is completed, your loan becomes a traditional mortgage. Your lender may call this getting converted, modified, or refinanced. These loans are also referred to as all-in-one or construction-to-permanent (CTP) loans.

Two-close construction loans, or multiple loans, require that you get approved for two separate loans. The first loan will fund the physical construction of your home, and then you’ll need to apply for—and get approved for—a separate long-term loan on the completed home, to refinance the construction loan to a 15- or 30-year mortgage.

Which course is better will depend on your situation and preferences. 

Single Close Option

If you like one-stop shopping, you might lean toward a one-time or single-close loan, for the following reasons:

One application: With a single-close loan, you only have to go through the process once.

One closing: A one-close construction loan means you pay closing costs once; you'll pay some costs twice if you choose the two loan option, but many fees are based on loan amount, and not really duplicated.

Financing is done: Having end loan in place before you borrow for construction may reduce some risks. For example, if you lose your job during the construction phase, you’ll still have your permanent financing. With a two-time closing, you’d have a hard time convincing a lender to approve your loan while you’re in between jobs, and that might mean losing the home before you even get to live in it.

Any number of things can go wrong during construction, and you have less to worry about if you’ve got a commitment from a lender from the get-go.

Change Orders: I'd be surprised if the cost of the construction didn't change along the way when you added something to the house. On a one time close loan, because the loan is already "closed", and modifications and additions to the house will be required to be paid in cash at the end.

Locking rates: Many one time construction loans require you to lock right away based on the final finished date. Interest rates go up higher and higher as the length of time needed to close gets longer. For example, a 30-day lock rate can be easily 1/2% lower rate than a 360-day lock.

Some one time close make you float the interest rate until less than 60-days before closing.

Standard Two Loan Option

Using a standard construction loan, then a standard end loan has many advantages.

The first is you are not tied together with the construction loan lender. Sadly, it is very common with a one time close end loan to be far less than the most competitive rates when the time comes to convert. The biggest reason is simply because you have no choice but to take whatever they offer.

Better rates: Single-close loans may come with slightly higher rates on the construction loan as well as the permanent loan. While single loans may lower your risk and provide the convenience of one closing, those benefits can come at a cost. Paying more in interest over time can easily wipe out minor savings on a two loan version. 

Flexibility: When you use one loan, you’ll have to choose a prepackaged program. Lenders may offer you choices of single-closing 15-year, 30-year, and ARM loans. Keeping your permanent loan separate from your construction loan means you can search and apply for any loan you want—not just the limited offerings available to you from one lender.

Change Orders: Changes and additional costs of those changes can usually, and easily be added to your end loan. Single close changes are an out-of-pocket cost.

Locking rates: Two closings clients usually float the rate with their preferred end loan lender until the last 60-days. You can also do longer-term locks too if you wish.

Higher costs: Most people only find the one close option appealing over the belief of savings in closing costs. While this is true, the amount is never as bad as you think.

With the added flexibility and better rates, the standard two time close is the winner for most people - and that might just very well be why it is still the most common way people do new construction of homes NOT in builder developments.