What is a two time close construction loan?
A two-time close loan differs from a one-time close construction loan in that there is one closing at the beginning of construction, and a second closing to refinance the construction loan into a permanent mortgage once construction has been completed.
Upon closing on your initial construction loan, you’ll begin making interest only payments to the lender and these payments will increase as construction progresses.
Once the construction has been completed, you’ll refinance the construction loan into permanent mortgage. A two-time construction loan offers more flexibility.
Generally, you’ll be able to get a lower rate on your permanent mortgage compared to a one-time close construction loan.
Benefits of a Two Time Close Construction Loans are as follows:
- Flexible qualifying requirements
- Possible $0 equity out-of-pocket
- Ability to finance closing cost and construction interest from the first loan into the second loan
- Construction / draw tracking
- Completion inspections
Two-time close construction loan process
Getting started with a two-time close construction loan is easy. Just follow the steps below to secure and close your two-time close construction loan.
- Gather documents necessary to get pre-approved.
- Submit application for pre-approval.
- Review budget and building plans with home builder sales team.
- Get plans & itemized building budget.
- Submit plans and lot to appraiser.
- Receive approval & clear to close construction loan.
- Purchase agreement enters escrow with builder.
- Construction loan funded.
- Construction begins [3…6…9 months] construction completed.
- Completed house submitted for inspection and appraisal.
- No credit related purchase from 1st closing up until the 2nd closing
- No change orders submitted that alter the financing or down payment amounts
- Must provide on going paystubs
- Down payment placed in escrow at the time of initial closing
Two-time close construction loan closing cost
A two-time close construction loan gives the borrower the choice to include both closing costs and interest into the loan for total $0 cash out-of-pocket
- 2% origination [based on the construction loan amount] $250 processing
- $300 legal document preparation
- $125 recording fees
- Owner’s title policy [based on house purchase price / cost]
- Lender’s title policy [based on construction loan]
Since the homeowner is paying for both a lender’s and owner’s title policy at the construction loan closing, they do not need to pay for the policies again at the mortgage refinance.
Two-time close construction loan interest overview
A typical buyer can expect the following when financing their home with a two-time close construction loan:
- Phase 1: When the construction loan begins, any existing liens on the property [purchase or lot loan payoffs] will be paid with the construction loan so the loan is inclusive of both the lot and cost to build.
- Phase 2 of construction: Draws paid out are for soft costs [permits, insurance, soil tests], lot clearing, foundation preparation, plumbing rough in and foundation pour. This typically is about 15% of the total construction budget
- Phase 3 of construction: Draw pay outs will include framing, roof, electrical rough in, hvac rough in, insulation and sheetrock. This typically is about 35% of the total construction budget
- Phase 4 of construction: Draw pay outs will include insulation, drywall, flooring, paint, more hvac, more electrical, more plumbing and exterior stucco/siding/masonry. This typically is about 35% of the total construction budget
- Phase 5 of construction: Draw pay outs will include doors, counter tops, cabinets, final paint, driveway, security systems, and final clean. This final stage typically is the remaining 15% of the total construction budget
Fixed rate of 10.5% for the term of the initial construction loan. Thus in months 1 and 2 interest due may only be a few hundred dollars whereas in months 5 and 6 it may be several thousand. An estimated total interest paid over the term of the loan can be calculated to assist the homeowner in budgeting for this expense whether paid directly or throughout the loan.
- Click Here for a construction loan + FHA refinance scenario
- Click Here for a construction loan + conventional refinance scenario
Are you ready to move forward with a purchase or refinance? Please give us a call at 888-810-1459 and let us help you secure financing for the purchase of a new home or save you money on the refinance of your existing home. Be sure to ask your loan officer about our closing costs incentives and our low rate guarantee!
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Disclaimer: The information contained in this article has been prepared by an independent third party and is distributed to consumers for educational purposes only. The information is considered reliable but not guaranteed to be accurate. The opinions expressed in this article do not represent the opinions of Finance of America. Please consult with a licensed loan officer for expert advice regarding financing or refinancing a home.