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This structure is called a 'one-step' or 'single close' loan. A lender provides both the construction financing and permanent financing in a single loan. During the construction phase, periodic draw payments are made to the builder based upon work completed. Monthly interest payments are made to the lender. At completion, the loan modifies to a permanent loan. The construction interest rate and permanent loan rate can usually be locked in to protect the buyer from increases in interest rates during construction. Be sure to find a lender that has experience with this type of financing.
The single-step structure has the following advantages:
• A single lender is used throughout the process.
• There may be local and federal tax advantages of a single step loan.
• Closing costs duplication is minimized.
• The interest rate during construction and the permanent loan rate can be locked.
The principal disadvantages are:
• There are fewer lenders providing this type of financing.
• Make sure the lender is experienced with the single step close loan; if the lender does not have the expertise, the process may be time-consuming and complex.
• Interest must be paid during construction; if you have a house to sell, this could result in cash flow strains during the construction period. (A few lenders offer a no interest payment during construction option, which eliminates this issue.)
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