Construction to Perm Loans Will Eliminate “Out of Pocket” Costs for Site Preparation and Improvements
Financing a package that utilizes land which has not been prepared for home placement means it will have to be prepaid and/or completed by the land/home purchaser prior to the home being delivered on site. Home placement prep includes things like excavation, foundation, utilities to site including well, septic, and others, and the payment of regulatory fees such as permits, assessments, school fees, developer fees, and others. Alternatively, the home buyer can obtain a land/home construction loan.
Construction to Perm financing of a manufactured home or modular home is similar, with a few slight variances, to financing the construction of a traditional site-build home. A construction loan is a temporary loan bridge to the permanent loan.
Construction loans are combined with either an FHA or conventional loan. Loan terms are in place during the construction period (usually 5-6 months), and then changed to the terms of the mortgage loan once the construction is completed. Construction lenders will either require a one time close, or a two time closing. A one time close, as the name suggests, requires only a single closing. A two time close requires closing on both the construction loan and permanent loan, which can result in higher closing costs.
Upon approval, the mortgage lender will issue a formal commitment letter based upon the exact cost of the home, including the sales price of the home as agreed upon with the seller, and written contractor agreements detailing costs of site prep including foundation, utilities, site-built structures such as porch decks, awnings, garage, installation of home, etc.
A disbursement agreement will include advances (draws) to the various contractor(s) at completion per schedule. The cost of home will be the first scheduled draw, due upon arrival of home on site. The home purchaser will be required to pay interest payments on funds disbursed during the construction process. The length of the construction phase is based upon an agreed time frame for completion. Exceeding that time line can result in extra fees and penalties.
The home buyer will not begin making payments on the permanent loan until all construction has been completed, all permits signed off by a building official, lien clearances obtained, appraisal confirmed, and a certificate of occupancy issued. Only then will the construction loan convert to the permanent loan.
The interest rate on your permanent loan is locked at the time your construction loan is closed, so you don’t have to worry about the interest rate increasing while your manufactured home or modular home is being built. With construction to perm financing, it’s important to note that the construction lender and permanent lender may not necessarily be the same.