Building your dream home is a fun and enjoyable experience, but when it comes to financing, many people are lost on the type of loan they need. Borrowers have two main choices when it comes to construction financing: a one-time close construction loan, or a two-time close loan. Each offers a way to construct a new home, but they work quite differently in practice, in cost, convenience and risk.
We’ll take a look at the specifics of one-time close construction loans compared with two-time close loans in this post, so that you can choose the right path toward your budget and the necessary construction on your home.
What is a One-Time Close Construction Loan?
A one-time close construction loan (also known as a construction-to-permanent loan or single-close loan) is a mortgage that combines the construction loan, using your builder, and the mortgage in a single, one-time closing. You apply once, close once and lock in your interest rate up front.
This means that the loan automatically remains as a permanent mortgage when your house is finished, and there is no additional closing.
What is a Two-Time Close Construction Loan?
A two-time close construction loan splits the financing in two separate loans:
- Construction Loan – Covers the cost of building the home.
- Permanent Mortgage – Once construction is finished, you must apply for and close on a separate mortgage to pay off the construction loan.
It involves two apps, two closings, and often two interest rates, one for construction and one for the loan itself.
Benefits of Choosing a One-Time Close Construction Loan
Now that we know the distinction, let’s discuss about the advantages that the one-time close loan entails in comparison to the traditional two-time close.
1. Convenience of a Single Closing
The single most apparent advantage to a one-time close construction loan is simplicity. You only have to:
- Apply for financing once.
- Submit your financial documents once.
- Pay for closing costs once.
In contrast, with a two-time close, you must do the loan-process-emission dance again after construction ends, with fresh paperwork, additional credit checks and another round of underwriting.
For borrowers with jam-packed schedules, the shortened time frame of a single closing can be a timesaver and a mental health booster.
2. Cost Savings on Fees and Closing Costs
Each time you close on a loan, you pay fees, which include:
- Loan origination fees
- Title fees
- Appraisal fees
- Recording fees
- Attorney or notary fees
With a two-time close loan, you pay the costs twice. Because with a one-time close, you pay them once, a savings that can amount to thousands of dollars.
For example, if average closing costs run about 2–5% of the loan amount, doubling them could add up to a lot of cash. Opting for a one-time close loan means less money is spent to bring you home, which means more money in your pocket for furniture, landscaping or savings down the road.
3. Locked-In Interest Rate
When you work with a one-time close construction loan lender, you’re locking your interest rate while the construction project is in its planning stage and long before the build has begun. In other words you’re covered against rising interest costs during the building phase and this could vary from 6-12 months, to possibly longer.
On the other hand, with a two-time close loan, you might not find out what your permanent mortgage rate is until construction is finished. If interest rates increase during that term, you might find yourself making much higher monthly payments than you expected.
4. Simplified Qualification Process
Mortgage approval is not always easy to obtain, even if your income, debt and credit situation haven’t changed since purchasing your home. You have to qualify only once with a one-time close loan, at the start.
With a two-time close loan, however, you’ll have to prequalify for the permanent mortgage once construction is completed. If there’s been a change to your financial situation (such as a new job, more debt or a drop in your credit score) you could be at risk for denial or less favorable terms of the loan.
This fact alone makes a one-time close loan a better choice for many borrowing wishing to have the peace of mind that comes with financial stability from beginning to end.
5. Smoother Construction-to-Permanent Transition
Construction to permanent loan One-time close loans typically convert from a construction loan to a standard one when building is complete. No reapplying, renegotiating or re-closing is necessary.
A two-time close loan, however, can leave you with a stressful gap between completing construction and locking in permanent financing. If you experience delays, paperwork snafus or a rate change, it can put your move into your big new house in history as a fiasco.
6. Less Risk for Borrowers
In Building A House There Is Already Uncertainty. Who Knows What It Will Really Cost Between A Change Order, Delays, Price Increases, Or The House Dragging On You’re Closing Date. A one-time close loan is less risky, since your financing is locked in from the start.
If the housing market changes or you experience a change in your financial situation after getting a two-time close, you could face difficulty in locking down permanent financing once the home is completed. At worst, a borrower can end up with a completed home and no long-term mortgage approval.
7. Potentially Faster Build Process
Builders and contractors may feel more assured going forward since things are all set up from the onset with a one-time close loan. They know that the financing is in place and won’t have to be renegotiated later.
At times, this predictability can result in w swifter and less confusing build against a two-time close loan.
8. Budget Certainty
When the dust settles with your one-time close loan, you already know your loan amount, your interest rate, and your monthly payments. This simplifies the financial options available to you both immediately as well as in the future.
Conversely, with two-time close loans, there is a greater amount of unknown. Interest rates, fees and even loan terms can fluctuate between your first and second closing, making it difficult to plan your long-term finances.
When Might a Two-Time Close Loan Make Sense?
One-time close construction loans have several benefits, but there are a couple of scenarios in which a two-time close might make sense:
- More Flexibility – You can look for better mortgage rates after construction is completed with a two-time close. If interest rates or your credit score improve, you may be eligible for better terms at the second closing.
- Personal Financing Needs – Some customers like to split the construction and end loans, especially if they plan to have a change in income at the time the project is built.
- Lender Access – A one-time close lender may not be available in all areas and two-time close lending is the only option.
Yet despite this, for most borrowers the ease, savings, and security of a one-time close loan will be the better option.
One-Time Close Loan Options (Including VA, FHA, and USDA)
One-time close loans aren’t exclusive to conventional mortgages. In fact, government-supported programs may even make them more attractive:
- VA One-Time Close Loans – Great for veterans and those on active duty, offering zero down payment and lenient terms.
- FHA One-Time Close Loans – For borrowers who don’t have excellent credit or who want to minimize the down payment necessary.
- USDA One-Time Close Loans – For income-qualified, rural homebuyers, these loans are available in many areas with no money down.
These programs offer the advantages of government-backed loans as well as one-time closing, to make home building more accessible to more people.
Final Thoughts
Both one-time close construction loans and two-time close loans are advantageous compared to other construction loan products, but the one-time close option is definitely preferred to save time, money, and peace of mind. With no second closing required, borrowers save on fees, lock-in their interest rate and lessen the likelihood of facing financial obstacles down the line.
Also, while a two-time close can be more flexible in some instances, for most borrowers, the streamlined and guaranteed nature of a one-time loan is a definite advantage.
If you’re in the midst of your dream home build, it might be worth looking into whether there’s a one-time close construction loan that will meet your needs. With the right lender and program, it can actually make the building process easier, more cost-effective and far less stressful.