Georgia Construction To Permanent Loans

Get your construction and permanent financing in one loan.

Construction to permanent loans allow borrowers to purchase a lot, build a home using a full time builder and to finance the home all in one loan closing. Below is our guide to construction loans.

For construction to permanent loans, we have two options.

Lock then build
In option 1, your rate is fixed from the day you lock it in. If it is a 30 or 15 year fixed loan, then it is locked both during the construction phase and then for 30 or 15 years after the completion of construction. If it is a 3/1, 5/1, 7/1 ARM, then it is locked during construction and then for 3, 5, 7, etc years after modification. You take a rate that is 1 to 1.25% higher than the current conforming rates in order to protect yourself from rising interest rates. With option 1 you would be required to pay 1% of the construction loan amount at the time we lock the loan. This fee is non-refundable. During the construction phase, you pay only the interest at your locked rate. At modification (after construction complete), the loan will begin it’s normal amortization schedule.

Build then lock
With option 2, you essentially have two loans. The first loan is an interest only construction loan which is tied to the Prime rate. As the prime rate changes, so will the interest rate on your construction loan. When construction is nearing it’s end, you would then lock into one of the permanent loan products. If you are locking within 60 days of completion of construction, then is no fee at the time you lock. So the advantages here are no up front lock fees and a market rate on loan when construction wraps up. The disadvantage being that you are floating during construction and rates can increase. To protect you from this there are two options which come at a price:

Build Then Lock Extended Rate Lock Option - As you get within 6 months of completion, you can do an extended lock for 90 to 180 days. Any of these lock periods will require an up front fee of 1% which is given back to you at closing. In addition, your rate will be higher as you increase the number of days in your lock. However, once you are locked, you no longer have to worry about rate increases. There is no float down option using extended locks.

Build Then Lock Rate Cap Program - This option provides a cap on rates from day 1 through day 365. Since construction should be complete within 1 year, that covers you throughout the construction period. The up front fee varies from 0.25% of the loan amount up to 1% of the loan amount. The higher the fee, the more protection you get from rate increases. This fee is NON-REFUNDABLE at closing, so you are essentially buying yourself protection. A one-time float down option is available and can be exercised any time within 30 days of modification (construction completion).

Regardless of which option you choose, here are few notes:

• Construction phase financing is available for a term of 12 months. Home should be completed within that 12 months.
  • Extensions are available for a fee. But 18 months is generally the max allowable.
• Land must have been purchased or will be purchased at closing with the first disbursement of the construction loan proceeds.
• Permanent phase financing is obtained at the same time as your construction loan. Only a single approval process - the permanent loan is automatic.

What are the advantages of doing a construction to perm instead of a construction loan followed by a permanent loan?
With a C2P loan, you only have one closing which takes place before you begin construction. This can save you money in closing costs, but the more important advantage is that your loan is only subject to approval once. If something were to happen to your credit situation or employment during the construction phase, it will not impact your ability to finance the home once it is complete. It often happens that clients will end up financing portions of the construction on their personal credit cards. When this happens, it can have a very negative impact on credit scores. With two separate loans, you will have two separate approval processes. Another advantage of a single loan is that, if you prefer, you can lock in a long term rate at the beginning of construction.

What are the advantages of doing a two separate loans?
Many times, local banks will have excellent rates on construction loans as well as slightly more liberal guidelines for getting them approved. By using a bank to get a separate construction loan, you can sometimes be approved for a larger construction loan amount. Then, when you near the end of your construction phase, you can contact us to help you “refinance” into a permanent loan. There are some inherent advantages to this. First, because of our knowledge of the industry, we are able to use your appraised value when doing this refinance. That means that you can likely (assuming the appraisal comes in higher than construction costs) get some cash out to pay off personal credit cards or to have money for some additional improvements that you decided to make along the way but were unable to fund with your construction loan. Additionally, the debt to income guidelines on a refinance are far more liberal than they are on a construction loan or a construction to permanent loan.

There are a lot of options here. What do you generally recommend to your clients?

• If you prefer to go the safer, construction to permanent route, typically, we recommend Option 2 (Build then lock). In fact, we typically recommend option 2 without either the extended rate lock or the rate cap. We recommend to our clients that once they get to within 180 days of project completion, that they begin to look at locking at that point. The reason for this is that the fees associated with Option 1 or with the Rate Cap option are high and they are not refundable. Furthermore, in the vast majority of cases, you are going to end up with a better rate than if you choose Option 1 and take a rate which is 1 to 1.25% higher than the market up front. However, if you are particularly rate sensitive, or have reason to believe that mortgage rates are going to move up significantly in the near future, you may prefer to go with option 1 or possibly the rate cap option.
  
• For clients who would prefer to go the more aggressive route of taking out a construction loan followed by a separate permanent loan, then we recommend that you find a local bank who can provide you with a good rate on your construction loan and then follow up with us to refinance you into a permanent mortgage when you are nearing completion of your project.

What other options are available to me?
Some of our clients choose to work with a local bank during the construction phase taking out only a construction loan. They then come to us when they are within 60 days of project completion to “refinance” that construction loan into permanent financing. Often, this turns out to be the best deal for our clients and in those cases, we are more than willing to work in this manner. If you find that you can get construction financing at a better rate from a local bank, please do not hesitate to discuss this other option with us. We are able to confidently offer this option because of our ability to consistently beat the mortgage rates at local banks by a large margin. So while they sometimes have access to better construction rates, we nearly always have access to better permanent mortgage rates.

What other approvals will I need in addition to the mortgage?
With a construction loan, you are subject not only to the standard credit approval, but there are a couple of additional approvals that will be required before the construction loan can begin to fund. You must submit adequate documentation for Contractor Acceptance and Project Approval.

• Contractor Acceptance consists of a review of the completed Contractor Questionnaire, contractor license (if required by state), driver’s license or picture ID, W-9, proof of liability insurance, General Contractor’s Letters, and Worker’s Compensation.
  
• Project approval consists of a review of the project plans and specifications, Construction Contract, Cost Breakdown, and Draw Schedule.