If you’ve started looking into home loans, you’ve likely been flooded with information about mortgages on existing homes. But what if you want to build your own? Whether you have your heart set on a specific homesite, need certain features just so, or want to build your dream home exactly as you’ve always wanted it, there’s a financing option out there for you. Learn all about construction-to-permanent loans below, and a variety of other loans to finance new home construction.
Advantages of a Construction-to-Permanent Loan
Construction-to-permanent (C2P) loans offer a wide range of potential advantages. An obvious plus is that by streamlining financing, you’re significantly simplifying the potentially complicated process of juggling two loans, or applying for one right after the other. With construction-to-permanent, you work with one lender, apply only once, and pay only one set of closing costs, application fees, and so on. Building your own home can also be an excellent way to become a homeowner in a competitive real estate market, where existing homes can be snapped up all too quickly.
As another perk, during the construction phase of the home, you’ll just be making interest-only payments on the loan, with principal payments only kicking in after the home has been completed, and mortgage payments have begun. Loan terms often require that the construction phase be completed within a certain timeframe; our in-house mortgage company, K. Hovnanian American Mortgage L.L.C. (KHAM), offers C2P loans with a 10-month construction phase, followed by a 30-year fixed-rate mortgage on your completed home.
The C2P loans offered by KHAM give homebuyers a unique opportunity for certainty, above and beyond a number of other lenders. Our single-close loans lock in interest rates for the duration of the construction and the mortgage, so that you know what you’ve getting into, and won’t have to worry about rising interest rates. If your timing is right, you could end up locking in rates that save you a bundle in the long run, a year or more before your mortgage even starts – and your rates will stay the same for as long as you own your home.
For a real-world example of how market environments can fluctuate, look no further than the COVID-19 pandemic. At the start of the crisis in Spring 2020, the Federal Reserve drastically reduced interest rates in order to provide some economic relief to Americans who were suddenly struggling. This began a nearly two-year period of historically low interest rates, when many new homebuyers found themselves locked into low interest rates (say, 3%) for their entirety of their 30-year mortgage. As the economy recovered, interest rates began to (modestly) rise as well, with the Fed approving a new interest rate hike in spring 2022. These kinds of fluctuations are certainly no reason for panic – but they are a handy illustration of how timing and rate locks can matter.
That’s not the only plus of a KHAM C2P loan. In contrast to many other lenders who offer fixed-rate construction loans, our mortgage company loosens your financial restrictions as soon as you close on your loan. What exactly does this mean?
Many lenders will approve you for a home loan – whether a construction loan or standalone mortgage – based on factors like your credit score and income. But what many borrowers don’t anticipate is that even once they’re approved for the mortgage, lenders will run a second or even third check on those metrics soon before you close on your completed home, and they reserve the right to rescind your mortgage, based on any additional checks. (See our recent blog post for more information on how this can happen, and how to avoid this). Some single-close loan borrowers have found themselves in the unfortunate position of no longer being able to pay for their dream home once it’s actually finished being built, and watching it be sold to someone else.
In order to avoid such a fate, borrowers who’ve opted for these lenders need to be extremely careful during their initial loan approval, and second or third application checks just before they close on the home. They’ll need to avoid large purchases, open new lines of credit, dip significantly into their savings, or change their employment to make sure they haven’t become a weaker candidate on paper. Construction loan borrowers in particular may find this regimen extremely difficult to stick to as their home is being built, when they’ll be eager to buy new furniture, hire designers, and work to craft your perfect home inside and out, to be ready and waiting for you on closing day.
KHAM believes in giving homeowners the freedom to get going on putting their dream home together, without the worry of additional checks on their loan application looming in the future. We’re committed to honoring the loans we approve you for in the beginning, so that you can feel secure in your financing, and breathe easy as you buy that living room set, or plan a vacation to celebrate the completion of the home you’ve always wanted.
For anyone contemplating home ownership, the question of financing an existing home might seem tricky enough, without the added complexities of new home construction. But like any other part of the process, a little background knowledge and planning can go a long way in making any obstacle seem manageable – and a construction-to-permanent loan can be an invaluable tool in helping you get there.
K. Hovnanian American Mortgage, L.L.C. 3601 Quantum Boulevard, Boynton Beach, FL 33426. NMLS #3259 (www.nmlsconsumeraccess.org).Licensed by Arizona Department of Insurance and Financial Institutions. Lic. #906585. Licensed by California Department of Financial Protection and Innovation under the California Residential Mortgage Lending Act. Lic. #4130532. Licensed by Delaware Office of the State Bank Commissioner to engage in business in this State. Lic. #7864 Expiration 12/31/2022. Licensed by Florida Office of Financial Regulation. Licensed by the Georgia Department of Banking and Finance #22272. Licensed by the Maryland Office of the Commissioner of Financial Regulation. Licensed by New Jersey Department of Banking and Insurance. Licensed by Ohio Division of Financial Institutions. Lic. RM.850228.000. Licensed by the Pennsylvania Department of Banking and Securities. Licensed by South Carolina Board of Financial Institutions. Mortgage Banker Registration issued by Texas Department of Savings and Mortgage Lending. Licensed by Virginia State Corporation Commission, Bureau of Financial Institutions Lic.#MC-2661. Licensed by the District of Columbia Department of Insurance, Securities and Banking. Licensed by the West Virginia Division of Financial Institutions. See a Sales Consultant for full details. Equal Housing Opportunity.
Last Updated on July 20, 2022