Assurance Financial Blog

How to Finance New Construction


When it comes to financing a construction project, there are several options available to you. Depending on the lender, your situation, and whether you own the land, can all change the options available to you.

Let’s start with the basics.

Single-Closing & Two-Closing Transactions.

Single-Closing Transactions have stricter underwriting guidelines, and the Loan-To-Value (LTV) is calculated using the lesser of appraised value and acquisition cost. Before moving forward, an LTV describes the size of a loan compared to the value of the property securing the loan.

A Construction Loan is modified or adjusted to the permanent terms, thus the “Single-Close” labeling. Because the loan documents specify the terms of the permanent financing, the construction loan will automatically convert to a permanent long-term mortgage upon completion of the construction.

Eligible loan purposes for Single-Closing transactions:

  • Purchase Transaction: Borrower does not own the lot before loan application
    • LTV calculated using the lesser of the “subject to” appraised value or acquisition cost.
  • Limited Cash-Out Refinance Transaction: Borrower owns the lot before loan application
    • LTV calculated using the “subject to” appraised value.

Two-Closing Transactions are the most common and flexible structure, having more flexible underwriting guidelines. The LTV is calculated using appraised value, and equity is considered towards down-payment.

The main difference between the two transactions are the types of documents signed at conversion. Two-closing construction-to-permanent mortgage transactions utilize two separate loan closings with two separate sets of legal documents. Even though there are two notes, it is still considered one transaction.

Eligible loan purposes for Two-Closing Transactions:

  • Limited Cash-Out Refinance Transaction
  • Cash-Out Refinance Transaction: Land was owned at least six months before closing construction loan.
    • LTV is calculated based on the “subject to” value of the project.

This process can vary depending on what you’re looking for and how you’d like to finance the construction. In everything that is done, communication is key to a successful transaction! Which is great, because we’re excellent at that. Contact us today so Loan Officer can help you finance your next construction operation with the option perfect for you.

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