A one-time close (OTC) construction loan (sometimes called a “single close” loan) is a type of construction loan that combines both the construction financing and permanent financing into a single loan — Rather than having two separate loans for the construction and the mortgage.
What is a construction loan?
A construction loan is a short-term loan that is used to finance the construction of a new building or major renovation of an existing one. But unlike a traditional mortgage — which is disbursed in a single lump sum at closing — a construction loan is paid out in stages or “draws” as the construction progresses.
Typically, a construction loan will have a variable interest rate and a term of one year or less, although some lenders may offer longer terms. The borrower usually has to provide a substantial down payment and collateral in the form of the property being built or renovated.
Once the construction is complete, the borrower can either pay off the loan in full or refinance it into a more traditional mortgage. The amount of the loan and the interest rate will depend on factors such as the borrower’s credit score, the value of the collateral, and the expected cost of the construction project.
How does a typical construction loan work?
The construction loan process typically involves the following steps:
The borrower contacts a lender to discuss their financing needs and provides basic information about their financial situation, including their credit score, income, and debt-to-income ratio.
The lender will then determine whether the borrower is eligible for a construction loan and provide an estimate of how much they may be able to borrow.
02. Loan application
If the borrower decides to move forward with the construction loan, they will submit a formal loan application and provide detailed information about the construction project, including plans and specifications, cost estimates, and a construction timeline.
The lender will review the application and supporting documents, and will require an appraisal “subject to” completion to determine that the property will have sufficient value when finished. The appraiser will re-visit the property after construction is done to verify completion.
03. Loan approval
If the lender approves the loan application, they will issue a commitment letter outlining the terms and conditions of the loan, including the interest rate, fees, and loan amount. The borrower must then sign and return the commitment letter to accept the loan offer.
04. Disbursement of funds
Once the loan is approved, the lender will disburse the funds in draws as construction progresses. The borrower must submit invoices and other documentation to verify that the work has been completed before each draw can be disbursed.
05. Completion of construction
Once the construction is complete, the borrower must obtain a certificate of occupancy and any necessary inspections before the final draw can be disbursed.
06. Pay off or refinance
At this point, the borrower may choose to either pay off the construction loan in full or refinance it into a more traditional mortgage.
Construction loans are complicated
You may have noticed that getting a construction loan can be a confusing process. That’s because once the home is built, most borrowers need to refinance their construction loan into a permanent mortgage to pay it off.
This is known as a “construction-to-permanent” loan. It involves a new loan application, underwriting, documentation process, and more loan fees.
Thankfully, you can avoid these additional financing headaches by opting for a one-time-close (OTC) construction loan. We offer such a program at Network Mortgage. Read on for details.
The Network Mortgage OTC construction loan program
Our one-time close (OTC) construction loan allows a borrower to close both the construction loan and permanent financing of a new home at the same time. An OTC transaction occurs when the borrower is buying (or has bought) land and needs financing for the new construction property.
Features and benefits:
- The mortgage pays for the new construction.
- Available for conventional Fannie Mae loans.
- Regular Fannie Mae loan limits apply.
- New construction only (no renovations or remodels).
- Only one interest rate: You have the option to modify down if the market improves.
- Only one closing: You pay only one set of closing costs.
- Borrower must work with a licensed and bonded contractor.
- Borrower must make interest-only monthly payments on the loan balance.
- Construction must be completed in 11 months.
- Lender must approve the project.
Purchase vs refinance:
If borrower is purchasing the land: If the buyer is purchasing the land and taking title at the same time as they are financing the new construction, the transaction will be treated as a purchase.
If borrower owns the land: If the borrower already owns the land (free and clear, or financed), the transaction will be treated as a rate and term refinance.
Only one application process
With a Network Mortgage OTC construction loan, the borrower goes through our loan application process only once, and at closing the funds are disbursed to finance the construction project.
The loan is then converted into a traditional mortgage when the construction is complete. This eliminates the need for the borrower to go through a second loan application and approval process.
The construction loan process can be complex and involve multiple parties, including the borrower, lender, builder, and other contractors. It’s important to work with experienced professionals to ensure that the construction loan process goes smoothly and the project is completed on time and within budget.
A one-time close (OTC) construction loan (also called a “single close” loan) is a type of construction loan that combines both the construction financing and permanent financing into a single loan — Rather than having two separate loans for the construction and the mortgage.
We can help
By their very nature, construction loans can get complicated. Even for many seasoned lenders, they can be tough to navigate. To make matters worse, there’s a lot of misinformation and bad advice out there. If you’d like to speak with some smart folks who can clear away the jargon and explain construction loans in simple terms, you’ve come to the right place.