Single-Close Construction Loans vs. Two-Close Construction Loans: Pros and Cons
August 2, 2024
Are you exploring your home ownership options and thinking about the construction of a brand-new home?
Consider the basic loan options available: single-close construction loans and two-close construction loans. You may already know what loan type is right for you, but making an informed decision is key.
Each loan type carries distinct benefits and drawbacks, so understanding the key differences is crucial before choosing. Beyond this, there are choices related to the type of construction loan you seek, whether conventional, FHA, or VA.
Single-Close Construction Loans
With a single-close construction loan, the borrower applies for the entire loan amount upfront. The funds do not pass directly to the borrower; instead, they go into escrow and are paid as “draws.”
When the building work is done, the loan becomes a permanent mortgage, transitioning the borrower to principal and interest payments. No credit application is required for this.
Pros:
In a two-close construction loan, the borrower receives a loan amount at the beginning of construction to cover approved costs and a second loan upon the project’s completion.
Interest-only payments are typically made on the initial loan amount during the construction phase, followed by principal and interest payments on the combined loan amount once the construction is complete.
Pros:
When reviewing construction loan options, borrowers should consider conventional and government-backed options from the Federal Housing Administration and the Department of Veterans Affairs.
These government-backed mortgage loans offer advantages such as lower down payment requirements and flexible underwriting guidelines.
FHA Construction Loans:
Want More Information About One-Time Close Loans?
We have extensively researched the FHA (Federal Housing Administration) and the VA (Department of Veterans Affairs) One-Time Close Construction loan programs.
We have spoken directly to licensed lenders that originate these residential loan types in most states, and each company has supplied us with the guidelines for their products.
We can connect you with mortgage loan officers who work for lenders who know the product well and have consistently provided quality service.
If you are interested in being contacted by a licensed lender in your area, please send responses to the questions below. All information is treated confidentially.
OneTimeClose.com provides information and connects consumers to qualified One-Time Close lenders to raise awareness about this loan product and to help consumers receive higher-quality service.
We are not paid for endorsing or recommending the lenders or loan originators and do not otherwise benefit from doing so. Consumers should shop for mortgage services and compare their options before agreeing to proceed.
Please note that investor guidelines for the FHA and VA One-Time Close Construction Program only allow for single-family dwellings (1 unit) – and NOT for multi-family units (no duplexes, triplexes or fourplexes).
In addition, the following homes/building styles are not allowed under these programs: Kit Homes, Barndominiums, Log Cabin Homes, Shipping Container Homes, Stilt Homes, Solar (only) or Wind Powered (only) Homes.
Please send your email request to [email protected] which authorizes OneTimeClose.com to share your personal information with one mortgage lender licensed in your area to contact you.
1. Send your first and last name, e-mail address, and contact telephone number.
2. Tell us the city and state of the proposed property.
3. Tell us your and/or the Co-borrower’s credit profile: Excellent – (680+), Good - (640-679), Fair – (620-639), or Poor- (Below 620). 620 is the minimum qualifying credit score for this product.
4. Are you or your spouse (Co-borrower) eligible veterans? If either of you is an eligible veteran, down payments as low as $0 may be available up to the maximum amount your debt-to-income ratio per VA will allow – there are no maximum loan amounts as per VA guidelines.
Most VA lenders will go up to $1,500,000 and review higher loan amounts on a case-by-case basis. If not, the FHA down payment is 3.5% up to the maximum FHA lending limit for your county.
Consider the basic loan options available: single-close construction loans and two-close construction loans. You may already know what loan type is right for you, but making an informed decision is key.
Each loan type carries distinct benefits and drawbacks, so understanding the key differences is crucial before choosing. Beyond this, there are choices related to the type of construction loan you seek, whether conventional, FHA, or VA.
Single-Close Construction Loans
With a single-close construction loan, the borrower applies for the entire loan amount upfront. The funds do not pass directly to the borrower; instead, they go into escrow and are paid as “draws.”
When the building work is done, the loan becomes a permanent mortgage, transitioning the borrower to principal and interest payments. No credit application is required for this.
Pros:
- One single closing process eliminates the need to requalify for a loan
- Streamlined paperwork
- No need for refinancing post-construction
- No second credit check after construction
- Larger down payment requirement
- Downpayments typically range between 10 and 20%
- Higher interest rates compared to two-close loans
- Underwriting is more complicated
- Potential delays if construction fails to be completed on schedule
In a two-close construction loan, the borrower receives a loan amount at the beginning of construction to cover approved costs and a second loan upon the project’s completion.
Interest-only payments are typically made on the initial loan amount during the construction phase, followed by principal and interest payments on the combined loan amount once the construction is complete.
Pros:
- Potentially lower downpayments
- Lower interest rates than single-close loans
- Simpler underwriting process than two-close construction loans
- Flexibility in case of construction delays
- Potentially higher expenses and time consumption
- A balloon payment may be due at the end of construction
- Refinancing requirement post-construction
When reviewing construction loan options, borrowers should consider conventional and government-backed options from the Federal Housing Administration and the Department of Veterans Affairs.
These government-backed mortgage loans offer advantages such as lower down payment requirements and flexible underwriting guidelines.
FHA Construction Loans:
- Offered to borrowers with lower FICO scores.
- Features more competitive down payments
- More accommodating underwriting guidelines for qualifying borrowers
- Allows financing the purchase of land plus construction of a new home where needed
- Guaranteed by the Department of Veterans Affairs
- Available to eligible veterans and active-duty military members
- No down payment requirement
- Competitive interest rates
- Applicable for financing the purchase of land and construction of a new home
Want More Information About One-Time Close Loans?
We have extensively researched the FHA (Federal Housing Administration) and the VA (Department of Veterans Affairs) One-Time Close Construction loan programs.
We have spoken directly to licensed lenders that originate these residential loan types in most states, and each company has supplied us with the guidelines for their products.
We can connect you with mortgage loan officers who work for lenders who know the product well and have consistently provided quality service.
If you are interested in being contacted by a licensed lender in your area, please send responses to the questions below. All information is treated confidentially.
OneTimeClose.com provides information and connects consumers to qualified One-Time Close lenders to raise awareness about this loan product and to help consumers receive higher-quality service.
We are not paid for endorsing or recommending the lenders or loan originators and do not otherwise benefit from doing so. Consumers should shop for mortgage services and compare their options before agreeing to proceed.
Please note that investor guidelines for the FHA and VA One-Time Close Construction Program only allow for single-family dwellings (1 unit) – and NOT for multi-family units (no duplexes, triplexes or fourplexes).
In addition, the following homes/building styles are not allowed under these programs: Kit Homes, Barndominiums, Log Cabin Homes, Shipping Container Homes, Stilt Homes, Solar (only) or Wind Powered (only) Homes.
Please send your email request to [email protected] which authorizes OneTimeClose.com to share your personal information with one mortgage lender licensed in your area to contact you.
1. Send your first and last name, e-mail address, and contact telephone number.
2. Tell us the city and state of the proposed property.
3. Tell us your and/or the Co-borrower’s credit profile: Excellent – (680+), Good - (640-679), Fair – (620-639), or Poor- (Below 620). 620 is the minimum qualifying credit score for this product.
4. Are you or your spouse (Co-borrower) eligible veterans? If either of you is an eligible veteran, down payments as low as $0 may be available up to the maximum amount your debt-to-income ratio per VA will allow – there are no maximum loan amounts as per VA guidelines.
Most VA lenders will go up to $1,500,000 and review higher loan amounts on a case-by-case basis. If not, the FHA down payment is 3.5% up to the maximum FHA lending limit for your county.
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