The Note Modification Home Construction Loan Financing Explained

Since there are so many options for construction loan financing, it is important to understand each option in order to make the best choice.  Two common approaches are the One-time close and Two-time close loans.  The one-time close loan is a single loan covering both the construction and your mortgage and the two-time close loan functions like two separate loans, each with its own closing date and terms.  Addtionally, the note modification home construction loan is a third option, which has elements of both. 

How It Works 

With a one-time close construction loan, you have only one interest rate for the total cost of both your construction and the final financing.  You have twelve months to complete construction.  After the twelve months, the lender will roll over the interest rate into one single mortgage.  This loan is easier to get, but the drawback is you are stuck with the same interest rate for two very different phases of your financing.  Your monthly payments may be the same during the construction and after the construction. With a two-time close loan, you have two different rates -- but you also have to go through two different closing periods, each of which will require a separate credit check and separate processing periods.

With a note modification construction loan, however, you have two different interest rates – one during the initial construction phase, and then another during the mortgage phase -- but only one closing.  You will most likely have a fixed rate for the construction phase of your loan, and you have a choice between a fixed or variable interest rate during the second phase.  During the initial year of construction, your monthly interest will usually be based on the total cost of the construction.

Getting A Note Modification Construction Loan

During the application process, you will be required to provide copies of your credit report, proof of income - including either pay stubs or tax returns along with a completed application.  You will also need the paperwork that most construction loans require, for example, a copy of your building plans and budget, a copy of your contract with your builders, or a copy of your deed to the land. 

You will also need to state the length of the construction phase of your loan.  Most lenders limit you to nine to twelve months of construction, but you could set this term for as little as three months.  Be sure that you allow enough time for your construction work because you can be assesed additional fees if your completion date is not met as specified.

Once the construction phase is complete, your second interest rate will be applied to the mortgage phase of your loan.  You will have the opportunity to choose a fixed rate or a variable rate.  There may also be some processing fees, but they would be less than the fees you would get from a separate loan.