Construction Financing | New Homes Market Center

What are the pros and cons to one time closes vs. two time closes?

As with most things in life, there are pros and cons to each of the two choices. In either scenario, you can generally choose to roll closing costs into the loan so long as there is room in the loan to value (LTV) ratio. A stand-alone construction loan, as you would get using the two time close method, will almost always require a significant contribution from you, the borrower. How much is required is determined by your credit profile and financial strength, as well as the lender’s comfort level with the project. Generally, you can expect to have come up with 10-20% of the cost of the project either in the form of cash or equity in the lot.

The two time close also allows you a little more flexibility in time frame. When you lock an interest rate on a mortgage, there is a preset time frame that the rate is good. With a two time close, there is no long term financing secured, so you do not have to deal with that time constraint. Your lender will most likely have a pre-determined time frame that they would like for you to pay their loan off, but extensions are easier and less expensive using this method. Cost over-runs are also a little easier to fund if there is not a final mortgage already in place with a predetermined loan amount waiting to be used once the house is complete. Once your home is built, you will have to secure long term financing in the form of a mortgage and you will be subject to another set of closing costs.

When it comes to construction financing, there are two primary benefits to using the one time close model over the two time close model. First, you can almost always base the terms of your loan on the “as completed” appraised value. This means that you can finance all of the costs associated with acquiring the property including lot, construction, closing, and interest costs so long as they fit into the LTV guidelines of the lender that you’re using. In other words, you can almost always get into the house with a significantly lower amount of money. In many cases, you can build without putting any money out of pocket at all until the house is complete. The other major advantage is that there is only one set of closing costs. Sometimes this one set of closing costs may be more than the closing costs of a traditional mortgage, but they will never be more than the sum of closing costs of a construction loan and a permanent loan that you would get using the two time close method. Using this method, you do have a long-term mortgage in place, which in itself has pros and cons. Some of the pros would be that you don’t have go through underwriting again, you don’t have to pay another set of closing costs, and you can have an interest rate locked in right from the start. The flip side of that is that you have a hard and fast timetable to meet.

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