If you are using your own credit and resources to finance the houses you build, you may want to consider a "One Time Close" construction loan for your homebuyer. It is a permanent loan that covers both the cost of construction and a modification to permanent financing in one loan. Unlike traditional housing practices, where the builder borrows construction money to build the home and the home buyer pays off the builder with a permanent end loan, the purchaser borrows the money, pays the interest as the house is built, and the Builder gets paid for his work. What a plan!
Under the OTC program, the homebuyer takes out all the financing to build the home and the loan is closed prior to construction having begun.
The loan is funded as the house is being built through construction draws to the contractor/builder. As the construction draws are funded, the borrower will pay interest only payments as the builder draws funds to build the home. Once the construction is complete and the loan is 100% funded, the lender will modify the Construction Rider into the permanent Note and the borrower's house payments become a traditional mortgage loan transaction. This process can generate substantial savings to the borrower over the course of the home building process. NOTE: OTC transactions are NOT the same as a Construction to Permanent transaction. A true Construction to Permanent transaction occurs when a borrower converts an interim construction loan into a permanent mortgage. This is considered a "two time close" transaction.
The One Time Close loan program has advantages for everyone involved:
For the Builder The loan is made to the Borrower. This allows the Builder to use their interim financing lines for other properties. (Or not use it at all!)
The Borrower does not have to go through the credit approval process again when the home is completed, unless the homebuyer changes their idea of how to repay the loan at modification. This eliminates the danger of job/career changes, additional debt, or buyer's remorse. Speculation is taken out of the project because the home is "pre-sold."
Any interest charge that is usually calculated into the sales price of the home becomes profit. Ta-dah, Take another look at your bottom line!
For the Realtor The realtor's commission is typically paid at closing, eliminating the wait until the construction is complete to be paid.
For the Homebuyer The loan is closed and ready for funding (draws) immediately by the lender. The Homebuyer and Builder communicate with the lender throughout the entire loan process.
And, Homebuyers generally need not worry about going through the permanent loan credit approval process at the time the home is completed. The Homebuyer can finance up to 95% of the value of the home after completion. This means they need very little cash to close (program specifics apply).
As there is only one closing, the Homebuyer saves the costs associated with title and appraisal fees on a two time closing.
Now, who is going to do this great financing for you$%: Well, you could go to your bank, and find they have an OTC program, and it might work very well for you, or it might work well for only 50% of the people you sell houses to, and so you're back to doing financing for the other 50%,
Or you could develop a partnership with a loan officer (you knew that was coming, didn't you$%:) who knows the OTC process, (that's a learning experience!) and who has lenders to fit every homebuyer.
I'd choose a loan officer relationships with many lenders because they know one size doesn't fit all borrowers. One who has relationships with major banks in the US who do one time close construction loans, and do them for homeowners, second homes, even investors. One who does loans with full documentation, and stated documentation. And that cover most credit circumstances.
There are lenders who put builders through a rigorous approval process (as if you were borrowing the money) and lenders who just want to see liability insurance and a license.
At the bare minimum, you'll need to furnish contracts (for the lot sale, if applicable, and the construction of the home); plans and specs, a detailed list of costs, and an after completion value appraisal.
The homebuyer submits a standard mortgage application and documentation to support it. The homebuyer is credit approved, the construction is approved, and the two of you meet at the closing table.
Normally, the lot is paid for, the real estate commission is paid, permit fees are paid, and the first draw is paid to the builder to begin construction. Subsequent draws are paid direct to you, based on completion schedules, usually within 48 hours of requesting the draw.
If you shop for a loan officer, I'd recommend that you look for one who has a relationship with multiple lenders who do the One Time Close loans, and who do a minimum of five or six a month, so they know the process. If you have inventory that you'd like to move, as you transition to using the OTC loans, your broker should also have programs to help you sell those properties.
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