Using a One Time Close Construction Loan to Finance Your Home

Unlike a mortgage loan, which finances an existing home, home construction loans are used to pay for both the construction of a home and the completed home.  One construction loan option is the one-time close construction loan, which lets you finance both the construction and the mortgage on the finished home at the same time. 

How A One Time Close Construction Loan Works 

Just as the name implies, a one-time close construction loan has one closing date and one interest rate.  Other types of loans have two or more closing date and rates associated with each of the home building process.  With a one-time loan, the funds are paid out for each stage of the process and ownership.  When you apply for your loan, you will need to be clear about the construction time period and must state whether it will take three months or twelve months before the project can be completed.

Once your loan is approved, the portion of your loan that covers the construction costs becomes available to the contractor or builder.  You have several payment methods to choose from.  You can choose make the funds available based on a “draw schedule,” where you allocate funds in advance and determine the when and how much the builder can be paid. Or, you can choose for the proceeds be paid based on a “punch list,” which gives the builder the flexibility to decide when to collect funds for construction expenses.  If you use a draw schedule, you may be able to schedule the payouts on calendar dates – for example, releasing a certain amount of money each month, or based on the completion of certain tasks ( for example a builder can collect money for interior paint only after the drywall has been finished). 

During the construction phase of your loan, you will be required to make monthly payments.  You will also have a choice how to pay your initial payments.  You can either begin making regular principal and interest payments, or you can just make payments on the interest for the amount of the loan that was used.  Once the construction phase is over, the loan is automatically converted into a regular mortgage, with regular monthly principal and interest payments, according to the terms allocated at the time of the loan. 

What You Need To Apply 

As with traditional mortgages, you will need to submit your lender copies of your credit report, your income statements, and any other paperwork they would need to determine your financial security.  You will be required to qualify based on guidelines established by each bank.  It is also important to keep in mind that since the loan is a construction loan, you will also need copies of all the paperwork related to your construction project, such as a copy of your contract with the builder, a copy of the blueprints and the construction budget, and other similar documents.  Check with your lender for the specific documentations they require.