Stewardship Capital

Construction Loans and One-Time Close Loans

Building a home takes money before the house exists. A construction loan pays for the build in stages. A one-time close loan combines the build and the long-term mortgage into one closing. This page explains both in plain words.

What is a construction loan?

A construction loan pays for building a home. The lender does not hand over all the money at once. It pays in stages, called draws, as work gets done. An inspector often checks the progress before each draw. When the home is finished, the construction loan ends, and a regular mortgage takes its place.

What is a one-time close loan?

A one-time close loan is also called construction-to-permanent. You apply once and close once. The same loan pays for the build and then turns into your long-term mortgage when the home is done. That means one set of closing steps instead of two.

Why do people choose one-time close?

Many choose it because it avoids a second closing and a second approval. It can also protect you from changes in your finances or the market between the build and the final loan. A two-step plan can still be right in some cases, such as when you want to shop for the final loan later. Stephen compares both with you.

Who can qualify for a construction loan?

Lenders look at the borrower and the project. For the borrower, they look at income, credit, assets and the down payment, or the land you already own. For the project, they look at the builder, the plans, the budget and the finished value. Government-backed and conventional versions exist. Their rules differ, and Stephen confirms what fits your situation.

What do I need to apply?

The list is longer than for a regular purchase loan. These items are common.

• Your income, asset and credit documents
• The signed contract with the builder
• Plans and specifications for the home
• A line-by-line budget
• The builder's license, insurance and track record
• Land purchase or ownership records
• Permit information

Many lenders require an approved builder. An owner who wants to build their own home faces tougher rules, and many lenders do not offer that option.

How do the draws work?

Draws are tied to the building stages, such as foundation, framing and finishing. The builder asks for a draw. An inspector confirms the work. The lender then pays. Because the builder is paid as work is done, delays in inspections can slow the build. Good builders know the system and plan for it.

What happens when the build is done?

When the home is finished, there is a final inspection. The local building department must sign off. The lender may ask for a final appraisal and proof that the work matches the plans. With a one-time close loan, the loan then becomes your regular mortgage. With a two-step plan, you close a new loan that pays off the construction loan.

What can slow a build down?

Builds can run late for many reasons. Permit delays, weather, material shortages and inspection timing are common. Cost changes can happen too. A good builder keeps the lender updated. A cushion in the budget helps. If costs rise past the cushion, the buyer may need to bring more cash. Ask your builder how they handle changes before you sign.

What should realtors and buyers know?

Building takes more time than buying a finished home. The appraisal is based on plans, so the numbers must be well supported. Costs can change during a build, so a cushion in the budget is wise. If a buyer needs to sell a home first, timing matters. Read our Buy a Home page for the buying steps, see loan limits by county for limits by county, and ask about our seller credit and buydown calculator when a builder offers credits.

This is not a quote, a commitment to lend or an offer of credit. Stephen Chakerian, NMLS #2193331 | Stewardship Capital, a team of Barrett Financial Group, L.L.C., NMLS #181106 | Equal Housing Opportunity.