How One-Time Close Construction Loans Work

How One-Time Close Construction Loans Work

One-Time Close (OTC) construction loans are a specialized type of financing designed to simplify the process of building a new home. Unlike traditional construction loans, which require two separate closings—one for the construction phase and another for the permanent mortgage—OTC loans combine both phases into a single, streamlined transaction.

This means that you only need to go through one closing process, which can reduce closing costs and eliminate the need for a second set of paperwork.

The loan is structured to provide funds in stages, known as "draws," as the construction progresses. Each draw is released after an inspection confirms that the work has been completed according to the agreed-upon plan and budget.

Key features of an OTC loan

1. One application process for two loans and a single closing: You only go through one loan application process and one closing process, reducing closing costs and paperwork.
2. Interest-only payments: During construction, you make interest-only payments, which helps manage cash flow. After your home is built, you’ll start making payments towards the principal as well.
3. Funding in stages: Funds are disbursed in stages, or "draws," as the construction progresses, ensuring efficient use of money.
4. Conversion to permanent mortgage: Once construction is complete, the loan automatically converts to a permanent mortgage with the terms and conditions you have agreed upon.

The OTC loan application process

1. Pre-approval: Get pre-approved to understand how much you can borrow.
2. Select a builder: Choose a reputable, lender approved builder and develop a detailed construction plan.
3. Submit documentation: Provide required financial and construction documents.
4. Property appraisal: The lender will assess the land and proposed construction to determine its value for the loan amount.
5. Permits and approvals: Make sure that you have gotten any building permits and local approvements that you need for the project.
6. Loan application: Complete a detailed application and provide personal identification. Generally lenders will want to see construction plans in addition to the traditional mortgage documentation like income verification etc.
7. Inspections: Regular inspections are required to verify construction progress.
8. Draw Schedule: The lender sets a draw schedule for fund disbursement.
9. Closing: Go through a single closing process for both the construction loan and the future mortgage to disburse the loan funds.
10. Construction phase: Make interest-only payments as the builder requests draws.
11. Completion and conversion: Once construction is complete, the loan converts to the permanent loan type you have chosen.

Things to consider about an OTC loan

• Builder selection: Choose a qualified, experienced, and lender approved builder.
• Regular inspections: Ensure the project meets lender standards.
• Mortgage insurance: Different types of OTC loans like Conventional and FHA may require mortgage insurance.

OTC loans offer a streamlined and efficient way to finance building a new home. With a variety of down payment options and mortgage types, OTC loans are available for a wide range of building needs.