If you’ve ever thought about building a new home on your land, chances are you’ve wondered exactly how you would pay for it, especially if you own an existing home. Managing two full mortgages is not ideal for most people. Luckily, there is a new home financing product called a construction-to-permanent mortgage that allows you to build your dream home in a more manageable way.
JC Jackson Homes’ preferred lender, Marie Phillips with First Citizens Bank, sat down with JC Jackson customers, Chris and Lauren, to discuss exactly how a construction-to-permanent mortgage works, and all its benefits to new home buyers. Click the photo to watch the video or read through the Q&A below!
Q: How does a construction-to-permanent mortgage work when we own the land?
A: Your land is worth a certain amount of money, called equity. You can apply that equity toward the down payment of your loan, reducing the amount of money you need to bring to the closing table.
Q: What’s the paperwork process like with a construction-to-permanent mortgage?
A: It’s the same paperwork as a traditional mortgage; you’ll need income and asset documents to underwrite the loan. A benefit of the construction-to-permanent loan is that there’s only one closing for two phases of the loan. You’ll have up to 12 months to build the home with interest-only payments, then it automatically rolls into a permanent mortgage, where you pay both principal and interest on a monthly basis.
Q: How long is the approval process for a construction loan?
A: It takes a little longer than a traditional loan, about 45 days. There is more due diligence involved with getting the builder approved and getting appraisals back.
Q: What are the asset requirements to get a construction loan?
At First Citizens, we are able to lend up to 90% of whatever the appraised value of your home is. You’ll need 10% equity, or down payment, plus closing costs of about $5,000.
Q: When do we start making payments on a construction loan?
You won’t have a payment until your builder starts drawing down on the construction loan. At that point, you’ll make interest-only payments for up to 12 months of the building process. Depending on when the builder requests the first withdrawal, you could make your first payment right away or 2-3 months later.
Q: What is the interest rate of a construction-to-permanent loan?
A: There are several construction-to-permanent loan products to choose from. “Front locks” lock in the interest rate for the first 12 months, then the rate would change based on the current market rate for the permanent mortgage. Or you could opt for a variable rate during the construction process, then lock in the rate when the home is complete. They each have different benefits, and we can discuss your options so that you choose the one that best fits your financial needs.
Q: What is Pre-Qualified vs. Pre-Approved?
In order to know how much you qualify to borrow for a construction-to-permanent mortgage, you need to be pre-qualified before you go under contract. Once you have your executed contract and know the specific terms, then your lender will go through the pre-approval process, which requires more documentation.
A construction-to-permanent mortgage is a great way to move forward on the construction of your new home without full monthly payments, giving you the time and the resources you need to sell your existing home, save money, or meet any other financial obligation.