I read the threads on construction loans, another rapid learning tool on BT as usual. But, I didn’t find any detail on the pros/cons of one close vs two close construction loans aside from the extra cost associated with two closings. So…
I will GC the project, and do certain parts of the project myself. I am working with a mortgage broker on financing. I have been told by the broker that we should get a two close loan (gee, that’s great for his piggy bank). The reason provided by broker is that a two close loan is more flexible. I should have asked in what manner is it more flexible, but my blood sugar was low. Does anyone know how it is more flexible?
One final detail that may be important: The previous owner is carrying the loan on my present house, due to financing problems associated with my house being considered by lenders as recreational property. My project will remove the recreational status and bring all living conditions up to standard lending criteria (I’ll finally have hot water and a shower among other comforts). Following completion of the project, I will transfer all debt to a standard loan.
Thanks,
Rob
Replies
Bump. This was written late at night, so the early risers may have missed it. Any takers?
You may wish to try this in the business folder..............
EricI Love A Hand That Meets My Own,
With A Hold That Causes Some Sensation.
[email protected]
Not a lot of help here. One v. two closings makes little sense to me. What does raise red flags is the previous seller financing and risk to the new lender.
You're looking to borrow. Loans generally need to be secured. Not usually by a second deed of trust, which mostly is used by a seller to facillitate a sale. If you have a closing, the original loan should be paid off, so that the lender can have first claim. I'm speaking from experience here, as a lender. Are you asking for a construction loan in addition to a refinance?
Your "recreational" status wouldn't be of any import to me. Simply, loan to value (LTV). That's where the risk is assessed.
The only part of your posting that seems logical is that with one closing I'd assume a strict timetable for completion. A second closing might allow more flexibility. Which would likely be in your best interest, as a GC with apparently minimal track record.
Your "blood sugar" comment does not instill confidence. Not to be overly negative, but if you would make some effort to understand the lender's viewpoint you might be better served.
PAHS Designer/Builder- Bury it!
"Not a lot of help here. One v. two closings makes little sense to me."
I'm not sure I understand your statement, unless you mean it's a no-brainer, one closing is the only way to go. Would you mind clarifying, please forgive me if I'm dense.
"Are you asking for a construction loan in addition to a refinance?"
I haven't been able to refinance/switch loan from previous owner to standard lender in the past due to the property difficulties (recreational status, wood heat only, no shower, etc.) I realize I could patch things in, get a standard loan, and then proceed, but I'd rather do it once and make it nice. I am putting in a basement with all the mechanicals and features to make it possible to get a standard loan. So I see your concern with the second deed of trust and how that relates to getting a loan. My understanding from the mortgage broker is that we would get a construction loan, complete construction, and then pay off the previous owner and put all debt in one place. Do you find this situation highly unlikely, as a lender? If so, then the mortgage broker is blowing smoke.
"Your "blood sugar" comment does not instill confidence. Not to be overly negative, but if you would make some effort to understand the lender's viewpoint you might be better served."
Agreed. Tough crowd at BT.
Thanks for the advice,
Rob
Hi Rob, you're not dense. Sorry if I was too cryptic. I literally can make almost no sense of one v. two closings. A closing is simply a legal conclusion of a deal. If you have two deals, there would normally by two closings. One usually only needs one closing.
There is an exception I've been party to, but it's obscure and had to do with timing of financing availability. Required 2 closings for one deal. The first one was "dry", without any money. Unlikely your situation.
I understand your past problem qualifying the property for traditional financing. That's where lender risk comes in. I probably would view the property as little more than unimproved land with a shed. That's why I asked what you were doing. If the land was worth enough, no problem, otherwise big problem.
Your broker's plan to do the construction and later pay off the current note holder means he's providing unsecured money? That's unlikely, but possible. I wouldn't, not even with a second deed of trust. High enough interest, maybe somebody would bite. That's the advantage of a broker, however, multiple sources of money.
What I thought you wanted was a construction loan wrapped in permanent financing. I haven't done it, but it's common. Then you'd have one closing to pay off your current note holder and later get draws for the construction. Upon completion of the construction, your permanent financing automatically kicks in. The trick is to convince the lender that the house will qualify, once you've completed the construction.
I'm not a mortgage broker and have rarely dealt with them, so there could be something I'm missing here. My comment about understanding the lenders' viewpoint had to do with understanding his risk. If you can demonstrate minimal risk, your life is much easier. An unsecured loan is not small risk.
For instance, guy (friend of a friend) called wanting to borrow to improve free and clear, unimproved property. What he wanted was a construction loan. Relatively small amount to be paid off in a very few years. After verifying the property, which cost him some surveying money, I provided a short term mortgage (which I'm very picky about the wording, particularly for penalties). I suggested he might find a better source than me, but the only way I'd provide the money was with a mortgage, requiring him to pay for a closing. With his, and wife's, credit they didn't have many choices. Normal financing was out of the question. If they'd had credit cards that might have been a reasonable alternative.
I knew he had jail time coming up, got caught growing something illicit. Offered to let him lapse the monthly payments for the incarceration period without foreclosure or late fees. Worked out well for everyone. My risk was minimal. The land was worth several times the loan amount. That's the small loan-to-value (LTV) that every lender loves. I also got well above normal APR.
Does this make more sense now? I really wasn't trying to be hard-azzed, but I truly didn't have much clue what you were doing. Big question is how your broker's proposed construction loan is secured. Then there's the issue of rate change. Do you want to bet that interest rates are going to fall? Or would you rather lock in now with a deal providing both refinancing and construction money?
Seems to me you'd want to do whatever provided the money at the least cost to you. Surely your broker could answer that question. Ask for a closing statement(s) both ways.PAHS Designer/Builder- Bury it!
Gene Davis knows about this stuff.... but he just changed his screen name and I can't remember what it is. Anyone?
Here is what I got by googling "construction loan two closings."
There are three fundamental ways to finance a New Construction home project:
Single-close CTP: This is the most common and cost-efficient construction loan option. The single-close allows homeowners to qualify and close with one application - one set of fees - one closing - one loan. This loan provides funds that are disbursed as needed during the construction phase and then converts to a permanent, fully-amortized mortgage at time of completion. The loan requires 'interest-only' payments be made on the monies disbursed during the construction phase. Most custom builders prefer this type of loan since the buyer, not the builder, finances the cost of construction. A single-close is typically the only choice when purchasing a modular home. Many lenders offer single-close CTP loans but few specialize in it.
Double-close CTP: This is the traditional method of construction financing that many lenders still offer today. A double-close CTP loan provides two separate loans: an interim 'interest-only' construction phase loan to build the home and then a new permanent, fully-amortized mortgage when the home is completed. Two applications - two sets of fees - two closings - two loans. There are few advantages to this loan type simply because it is more expensive than a single-close CTP loan.
Construction End-loan: A construction end-loan is simply a permanent mortgage that does not have a construction phase feature. It provides the buyer a traditional mortgage to purchase a completed new construction home. This option typically applies in subdivisions, condominiums and planned unit developments where the Builder or Developer has obtained the construction financing to complete the project and the buyer simply needs to obtain an end loan.
Gene Davis, Davis Housewrights, Inc., Lake Placid, NY
My understanding is that a one close will put you on a strict timetable because the rate at which the mortgage will be financed is pre-detirmed. 6 mos. is common.
A two close may give you flexability in your building schedule as the interest rate is not pre-determined, but is set to a point of reference such as the prime lending rate at the time of the closing.
And it may be a lot easier to carry the interest only for the duration rather than the whole note.
It's a menu.
EricI Love A Hand That Meets My Own,
With A Hold That Causes Some Sensation.
[email protected]
Thanks all,
That clarifies the matter substantially. Much appreciated.
Rob