Building a home requires capital. If you do not have the capital, you will have to secure a loan. However, banks do not offer long-term financing for building a home. What they do offer is called a construction loan. When you take out a construction loan, you have two options -- you can take a stand-alone construction loan or a construction-to-permanent loan (also known as OTC, CTP or one-time-close).
If you opt for the stand-alone construction loan, it is up to you to find permanent financing when your home is built. This type of construction loan will likely carry a balloon payment, which you must pay at the end of the term. Construction loans usually have terms for 12 months or less. A construction-to-permanent loan, however, transfers from a construction loan to a permanent loan at the time the home is completed.
A CTP loan is the most common option and is also a product that AnnieMac specializes in. AnnieMac is able to do CTP loans using conventional, FHA, VA and USDA financing. All of these options have different qualifications including different down payment amounts, credit score requirements and loan-to-value ratios.
Secure a Pre-Approval for a Construction-to-Permanent Loan
Before you apply for a construction-to-permanent loan, you should secure a pre-approval. This allows you to see what you can afford and which of the programs you best qualify for. Each program type has its own set of qualifications. For example, an FHA loan only requires 3.5% down when using a CTP loan, while a VA and USDA requires 0% down. Our conventional products requires 10% down when dealing with a CTP loan.
Without getting pre-approved up front, you may find yourself looking at a product that you do not qualify for, requiring you to go back to the drawing board. Securing pre-approval allows you to work within your budget when you look for builders and write up the house plans. Click here to get pre-approved by one of AnnieMac's construction-to-permanent specialists.
Find a Builder
Once you have a pre-approval, the search for a builder begins. It is important to disclose you available budget to the builder to see if they are a good fit for you. For example, if you have a budget of $300,000, you probably do not require a luxury home builder because they are used to working with higher priced homes and may have trouble staying within your budget. Be as open and honest as you can with each builder regarding your budget and desired plans in order to find a builder that is a good fit for you.
As you shop for a builder, make sure you inquire about their past experience. Personal references are usually the best way to tell how a builder operates. Most people are generally happy to talk about their experiences, both good and bad. You may even find that some references allow you to look at their completed home so you can see the builder's workmanship. The builder you choose plays a role in your ability to secure financing, so if you choose a builder without a lot of experience or with bad reviews, AnnieMac may turn you down for financing.
AnnieMac has a builder acceptance package that is available for download. Please note that AnnieMac does not approve or deny builders. We either accept them or do not accept them into our program. At the end of the day, the homeowner is the person who approves the builder. Our job is to prove that they have the capabilities and track record to complete your new build. AnnieMac recommends reviewing home builders on real estate websites, social media, the Better Business Bureau, and wherever else homeowners are reviewed.
Apply for the Loan
The largest benefit of applying for a construction-to-permanent loan is the ability to apply for both the construction loan and permanent loan at once. The application you complete applies to the entire process. This means once you secure an approval, you automatically have a permanent loan when your home is complete. If you were to apply separately for each loan, you would have to qualify for the permanent financing after the home building begins. If your credit, income, or employment changed during that time, you could have difficulty securing financing.
Applying for the construction-to-permanent loan works much like applying for any other loan. You must provide the lender with:
- Paystubs covering the last month of employment
- W-2s for the last 2 years
- Tax returns for the last 2 years if you are self-employed or work on commission
- Asset statements showing your down payment money and any reserves
- Employment verification from your employer
- Blueprints for the home (if available)
AnnieMac will also secure an appraisal on the soon-to-be-built home. The appraiser will appraise the lot and look at the blueprints for the home to come up with the value. This value is what the lender uses to approve you for the loan. They need to know that they will have sufficient collateral in your home once the loan turns into a permanent mortgage.
Work on the Timeline Together
The time it takes to build your home matters not only to you, but to AnnieMac as well. A part of your approval is based on the agreed upon timeline with the builder. You can get involved in the process as well so that you know what to expect. AnnieMac will not allow the construction portion of the loan to remain outstanding for long. Usually, AnnieMac requires that the building time is not to exceed nine months. This means the builder has 9 months to complete the home. However, there is more to it. AnnieMac needs to know exactly when each phase of the building process will be done. The builder cannot just agree to build a home in 9 months. Instead, he or she must go over the timeline with AnnieMac. At each phase, the builder must agree to an inspection by the Draw Administration team at AnnieMac. The bank will not release any new funds until each phase is complete and inspected. The more the builder works with AnnieMac, the smoother the process will go. This helps to prevent any delays in the building process.
The Loan Closing
One of the benefits about the construction-to-permanent loan is that you only complete one closing. With a stand-alone construction loan, you close on the construction loan first and then have a separate closing for the permanent financing. This means twice the closing costs along with the need to qualify for both loans.
The construction-to-permanent loan closing is done all at once. You sign the closing papers for both loans at one time, even though it is essentially only one loan. The lender rolls the entire loan into a permanent mortgage when the home is completed. This usually occurs after the city provides the Certificate of Occupancy, allowing you to live in the home.
The Payments on the Construction-to-Permanent Loan
The payments on the construction-to-permanent loan work differently than a standard loan as well. Initially, you make interest-only payments. In addition, you only pay interest on the money that was disbursed up until that point. Because construction loans work in phases, with only a certain portion of the funds being disbursed at a time, your payment will vary month-to-month. The more money the lender disburses, the higher your payment. However, remember, you only pay the interest portion on this money. You are not paying back any principal at this time. Your construction loan period interest rate is different than the permanent loan, but it is still fixed interest.
Once the construction-to-permanent loan transfers to a permanent loan, depending on your program, you may have the ability to float down your interest rate. However, keep in mind that each program has its own set of guidelines. AnnieMac offers a 15 or 30-year fixed rate program for the final product. This means once you move into the home, you pay principal and interest on your mortgage, rather than just interest. This allows you to start paying the balance of the loan down. Please ask your AnnieMac construction specialist if you have any questions about this process.
Determining the Interest Rate
Each program has different factors for determining the interest rate on your construction-to-permanent loan. For that reason, it is important to understand which program you qualify for. Your AnnieMac mortgage loan originator will help you determine which mortgage program works best for you. Once this is determine, your loan originator will be able to calculate an interest rate.
Preparing for the Loan
When it comes to CTP loans, there are not as many lenders offering the program. This means it is important to prepare yourself ahead of time for the loan. Below is a list of things that can help guide you to make sure you are doing everything in your power to make yourself as appealing financially for the underwriter. However, do not make any changes to your finances without speaking to your AnnieMac loan specialist.
- Make sure your credit score is as high as possible. Pay your bills on time and pay your large credit card balances down. The lower your balances are to your available credit, the higher your credit score will go. If you have any trade lines you do not use, do not close them out. Accounts with long histories tend to help your credit score in the long run.
- Minimize your debts. The higher your debt ratio, the riskier you look to any lender. At AnnieMac, each program has its own debt to income ration requirements. However, it is always a good idea to try and pay your debts down or off completely if possible.
- Save your money. Assets play a large role in the ability to qualify for a construction-to-permanent loan. AnnieMac has many different payment options depending on the program, but all require you to have reserves on hand. This helps you pay for your mortgage if your regular income were to stop suddenly. The more reserves you have, the less risk you pose.
- Do your research on builders in the area. Do not make the mistake of using the first builder you find. You do not know if AnnieMac will approve the builder or if they are best suited for your project. Look up online reviews and ask around about various builders to find out who is good in the area. You should also inquire about licensing, insurance, and experience with the type of home you want built to find the one that is right for you.
The construction-to-permanent loan is a great way to build your own home without having to worry about qualifying for permanent financing. Are you unsure of the benefits of building your own home? Check out our article What are the Benefits of Building your Own home? We also help you learn how to choose the right builder in our article How to Choose a Builder for Your New Construction Home.
With the construction-to-permanent loan, all of the work is done for you with the first loan closing. If you qualify for the construction loan, then you qualify for the permanent financing. If you want to learn more about the construction loan itself, read our article The Construction Loan Process for Financing a New Home or Is a Home Construction Loan Different from Buying an Existing Home?
In our article titled What are the Construction Loan Requirements, we go into detail about how to prepare yourself for a construction loan.
Once you are ready to take the plunge, read our article How to Find the Right Construction Loan Lender to learn how to find the lender that is the perfect fit for you!