Tacoma Construction Home Loans

What is a Construction Loan?

A construction loan, sometimes known as a self-build loan, is a short-term financing option used to cover the costs of building homes or completing other real estate projects.

In various ways, these loans differ from regular mortgages. They feature a short-term repayment arrangement, usually requiring payment within a year, and their interest rates are higher because they are unsecured. Another distinguishing aspect is that the loan amount is disbursed in installments as the development advances rather than all at once.

Construction loans need a significant down payment, often 20-25%, and approval may be demanding for those with a weak credit history. To obtain approval, borrowers must give detailed building details and work with a qualified builder. Financial stability, a low debt-to-income ratio, and a credit score of 680 or better are also required.

One-Time vs. Two-Time Close Construction Loan

When building a custom home, the two main options for financing are one-time close construction loans and two-time close construction loans. Depending on the circumstances of your situation and requirements, each type has its own features and potential benefits.

• One-Time Close

A one-time close construction loan, also known as a single-close loan, makes the process easier. This loan combines the construction loan and permanent financing into one loan, which means there is only one application to complete and one closing process to go through. Single-close loans provide locked rates, lower closing fees, and a level of simplicity by avoiding double underwriting. The loan immediately changes to a mortgage after the construction period.

• Two-Time Close

A two-time close construction loan requires two distinct applications, two closings, and two sets of fees: one for the construction phase and the other for the mortgage. The two-time close loan may offer reduced fees and interest rates during construction but must be repaid after completion. However, it carries a greater risk because the mortgage rate lock is uncertain, and there is the prospect of rising rates during construction. In addition, the borrower may not qualify for the second loan, which will become the mortgage once construction is complete. 

Pros and Cons of a One-Time Close Construction Loan

A one-time close construction loan, or a single-close construction loan, is a type of finance used to build or improve a home. The construction and permanent mortgage loans are combined into a single loan with a single closing process. 

Those who value simplicity and cost savings may find a one-time close construction loan suitable, but the disadvantages should be carefully considered. Here are the benefits and drawbacks of a one-time close construction loan:

Pros:

• Simplicity

It streamlines the loan process by requiring only one application and closing, which is less complicated and time-consuming than having separate construction and permanent loans.

• Cost Savings

Because borrowers only have to pay closing fees once, one-time close construction loans can save costs. 

• Fixed Interest Rates

These loans frequently feature set interest rates, offering the borrower confidence and stability.

• Qualifying Once

You need to qualify for the loan once, lowering the risk of not qualifying for the permanent loan once construction is completed.

• Government-Backed Options

Some government-backed one-time close construction loans, such as the FHA One-Time Close Loan, may require small down payments.

Cons:

• Higher Interest Rates

One-time closing construction loans frequently have higher interest rates than separate construction and permanent loans.

• Limited Flexibility

Once work has commenced, one-time close construction loans may provide less flexibility than two-close loans, particularly regarding rate adjustments and potential changes to loan terms.

• Credit Score and Cost Requirements

Some one-time close construction loans may have restrictions based on the cost of the project and a minimum credit score.

• Upfront and Monthly Fees

These loans may have additional costs, such as upfront and monthly fees, which might result in higher payments.

Apply for a Tacoma One-Time Close Construction Loan 

Capital Home Mortgage provides a variety of advantages to Tacoma homebuyers pursuing a construction loan with a single closing. First, they provide a variety of home purchase loan programs, such as conventional loans that adhere to Fannie Mae and Freddie Mac standards, flexible FHA loans, VA home loans for military members and veterans, USDA Rural Development programs, and Jumbo Loans. FHA programs may be appropriate for a one-time close construction loan because they combine construction and mortgage loans into a single application with a 3.5% down payment. A USDA construction financing can offer significant advantages to those seeking to build in rural areas, including no payments during construction and streamlined eligibility requirements. Capital Home Mortgage provides non-qualified mortgage loans for self-employed borrowers, retirees, and investors. Due to escalating property prices in Tacoma’s housing market, another advantage is the potential for capital appreciation.

Call 803-600-0088 to speak with our Tacoma Home Loan Specialists about your one-time close construction loan project.