The recent Commerce Department New Home Sales Report for December showed that 2015 was the best year for new home sales since 2007, a sign that the housing market is gaining strength and momentum. As the economy boosts consumer confidence, the industry outlook is optimistic for builders who adhere to best practices in production and financing.
Builders who educate clients about these loan options can help themselves and clients mitigate potential interest rate increases and lessen uncertainty.
For builders, construction to permanent financing eliminates builder debt service during construction because it allows buyers to fund projects from the ground up—including new construction or major renovations to existing housing stock. Builders receive a draw on the loan directly from the lender or the buyer at specified phases of construction.
But builders aren’t the only beneficiaries. Construction to permanent financing offers significant advantages to buyers. Because the loans allow consumers to lock in at current rates for the life of the loan, buyers circumvent the rate-induced stress of the traditional loan.
Additionally, in a rising interest rate environment, buyers who are renovating or buying new construction save money and benefit from a construction schedule funded in advance. In that regard, construction to permanent loans help keep projects on track and, in the case of income properties, provide owners more profit. New York City, for example, has been an epicenter of construction loan activity as construction to permanent loans help transform older homes into two- to –four-unit multi-family dwellings. Additionally, for buyers interested in investing in a second home, construction to permanent loans make dream vacation homes a reality. Most importantly, since construction to permanent loans allows interest-only payments during the first 12 months of construction, owners can lease during renovations, making loans even more attractive. After 12 months, monthly principal and interest payments begin.
A few options exist for construction to permanent loans. Some banks offer loans backed by the FHA. Others offer their own non-government construction to permanent loan products. Furthermore, while construction to permanent loans allow interest-only payments during a specified length of construction, loans also vary regarding closing costs, builder/consumer underwriting, and allowing renovations versus new construction to be financed. Some lenders offer interest-only payments during the first 12 months of construction and underwrite only the consumer. Some loans offer a single closing at completion of construction, which saves buyers money.
Consumers of all stripes stand to benefit greatly from construction to permanent loans. As the economy strengthens, builders who can help clients mitigate a mortgage rate increase can also ensure their own cash flow and project funding while taking advantage of this smart financing option.