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There are two main types of Conventional Construction loans.
1. One-time close
A one-time close construction loan has its pros and its cons
Pros – You only have to close once at the beginning of the transaction and you do not have to worry about re-qualifying for your permanent financing after the project is complete. The entire qualification process is taken care of upfront and your loan will automatically roll into permanent financing without anything else being done.
Cons – Your interest rate will be higher sometimes up to .75% higher. You may have some issues getting mortgage insurance as MI company do not like construction loans due to higher risk which means that you may have to bring 20% down to the table in order to get financed.
2. Two-time close
A two-time close construction loan also has its pros and cons
Pros- You will end up with a lower interest rate and a better loan which can save you thousands of dollars. Underwriting guidelines are not as stringent and most interim lenders are only concerned that you have a valid exit strategy to get out of their loan, meaning they want to make sure that you can refinance into your permanent loan when the project is complete.
Cons – The qualification process for the permanent loan cannot be finalized until after the project is complete. Should something happen to you financially between the time you were initially qualified you may end up being stuck in the interim loan. The good news is that there are things you can do to limit your risk.
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