Building a new home from the ground up is the ideal way to get the customized space of your dreams. 

However, to make the process as efficient and cost-effective as possible, you’ll need to choose the right loan option.

Typically, borrowers must get approved for a construction loan, build their home and then secure a permanent mortgage to pay for the home.

At Compass Mortgage, we make the process simple by offering our customers a one-time close, construction-to-permanent loan option. This means that you only have to go through a single closing, which lowers your overall costs and simplifies the process.

Let’s take a look at how a one-time close construction loan works and what you need to do to qualify.

What is a one-time close construction loan?

A one-time close construction loan combines the construction loan you need to build the home and the permanent loan you need to make your monthly principal and interest payments.

Construction loans are short-term loans that cover the costs to build a home, including:

• Land
• Plans
• Permits
• Fees
• Materials
• Labor

The borrower must apply for the loan and submit all the required documentation such as the plans, financials and timelines. They can then use the approved funds to complete the project. But once the project is finished, they either must pay for the home in full or secure permanent financing.

A one-time close construction loan is a combined construction and permanent loan, which means you qualify for both at the start of the project and only have a single closing.

When the construction period is over, the loan converts to a permanent, traditional mortgage where you will have a set term.

What is the alternative to a one-time close loan?

Without a one-time close option, the borrower must get approved for a construction loan, complete the project and then seek out permanent financing.

The construction loan does not convert into a permanent mortgage; so when construction is complete, the borrower must then be able to qualify for a traditional mortgage and cover the costs and fees for another closing.

The extra steps and costs involved make the process more difficult for borrowers; and if their financial situation has changed throughout the construction process, they may not be able to qualify for a mortgage.

Closing costs can range from 3-6% of the total cost. If you have to close twice — once on the construction loan and once on the permanent loan — you’ll be paying double that percentage!

Depending on the total loan amount, this can add up to thousands of dollars.

What are the benefits of a one-time close construction loan?

A construction-to-permanent loan results in one transaction and one closing.

Let’s take a look at the benefits of a one-time close construction loan:

• Combines a construction loan and permanent loan
• Borrower does not have to requalify upon completion of construction
• Single closing, which means lower overall costs

Now, let’s take a look at some benefits that are included in Compass Mortgage’s “Build and Save: 2 Loans — 1 Close” program:

• Fixed-rate, 30-year mortgage upon completion of construction
• Put down as little as 5% on conventional loans and 3.5% on FHA
• 0% down when combined with a VA loan
• Includes owner-occupied homes and second homes

The bottom line: One-time close construction loans allow borrowers to reduce their overall costs and lock in their rate before the home is even built.

How do I qualify for a one-time close loan?

The qualifications for a one-time close construction loan vary by lender, but borrowers generally must have a good credit score and a detailed construction plan.

Compass Mortgage requires that borrowers meet the following qualifications:

• Minimum credit score of 680 for a conventional loan, or 660 for FHA, VA or USDA
• Loan amounts from $175,000 to $726,200
• Builder must be approved

To make sure you qualify for a one-time close construction loan, consider the following tips to prepare:

• Save up for a down payment
• Lower your debt-to-income ratio (DTI)
• Find a licensed builder
• Develop a detailed construction plan
• Gather all your loan documentation, including your pay stubs and tax documents
• Get pre-approved

Pre-approval is the first step in any loan process, but it’s especially important for construction loans. 

The process will allow you to see exactly how much you can borrow and which loan option is right for you.

Not all lenders offer construction-to-permanent loans. You’ll need to work closely with a lender you can trust.

Not only can you be pre-approved with Compass Mortgage today but you can get a fully underwritten loan commitment, before you even begin your house hunt. We’ll also help you explore your full range of loan options.

Apply today with Compass Mortgage

In today’s market, locking in your interest rate is key to ensuring a smooth loan process from start to finish.

With Compass Mortgage’s unique Get Committed® program, you can lock in your interest rate before you even find the property you want to purchase.

Get Committed® is more than a standard pre-approval. It provides a fully underwritten loan commitment that guides borrowers through most of the steps in the loan process, potentially prior to finding the home you wish to buy . 

This means you have a loan commitment before you even make an offer on a home, which provides greater confidence and peace of mind to any prospective sellers to whom you make an offer.

Standard pre-approval does not mean that you have secured a loan — but Get Committed® does. 

Lock in your rate today and move through the lending process faster with the Compass Mortgage team, or contact us for help with your next steps.

We look forward to helping you build your dream home with our one-time close construction loan.

Photo by Anete Lusina