A construction perm loan is a long-term permanent loan that modifies a construction loan used to finance a building project. However the closing occurs prior to the beginning of construction. To understand why a construction perm loan is advantageous, you have to compare it to a construction-only loan. Construction loans are temporary. They drawn upon during the construction process. There is no principal paid on a construction loan during the draw stage, as it is used entirely to construct a project. A construction loan must be refinanced at completion of the project. With a construction perm loan, nothing else has to be done at the end of construction except to "modify" the construction loan into a permanent loan by signing the modification package. This is because the loan was closed prior to the beginning of construction.
Positive Aspects of Construction Perm Loans
A construction perm loan is a one-stop loan to build a home that takes the place of up to three separate loans. The first is that one can write a contract for the purchase of land, and add it to the loan package, saving the cost of closing a land loan. The second is the construction loan itself. One can go into a bank and get a construction loan and pay to close it. Later one would have to pay to close a permanent loan to pay off the construction loan. A construction perm loan would encompass all of these loans into one, saving money in closing costs. Costs are not the only thing saved by using a construction perm loan. This loan has the added feature that the borrower does not need to requalify for the permanent loan at the end of construction, since the loan is already closed.
Negative Aspects of Construction Perm Loans
There are some negatives with a construction perm loan. The homeowner has the option of locking in a permanent rate very early with construction perm lenders. This is a positive thing in times when interest rates are rising. But when rates drop, this can be a negative. However, some lenders allow for an option to float down. If rates have dropped substantially since a lock-in date, they will allow the borrower to drop the interest rate down to something closer to the more recent market pricing.
Uses of Construction Perm Loans
A construction perm loan can be used to finance many types of residential construction, including standard homes and even mobile and modular homes.
Flexibility of Construction Perm Loans
The construction perm loan has some flexibility in that it can be used to finance the remodeling of an existing home project. An example of this might include a borrower buying a small home at a great deal and using a construction perm loan to purchase the home, remodel and add an additional bedroom. Another interesting way to use this loan can be for a remodel of a home one already owns, and integrating all of the costs into a refinance.
Availability of Construction Perm Loans
Construction perm loans are offered by many major banks. Most use conventional guidelines for qualifying the borrower, but some offer FHA.