The Types of Construction Loans

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You have three choices when choosing your construction loan:

1. Single Close Construction Loan

This is the most common choice. You essentially get two loans – the construction loan and the permanent mortgage, but you do it all in one closing. You borrow the construction funds like any other construction loan. Upon completion of the construction, the loan automatically converts to a permanent mortgage.

You lock in an interest rate before you close, giving you predictable payments when the house is done. This type works best for home buyers that have all their ‘ducks in a row’ with a concrete construction plan and contractors on board.

In a low-interest rate environment, the single close construction loan makes the most sense. You lock in your payments for the future while securing the funds to finance the home’s construction. It’s the most popular option because you save on closing costs and have a predictable payment once construction is complete.

2. Two-Close Construction Loan

This option is more complicated but allows a little more freedom when building the home. You first apply for the construction loan based on the building plans and the funds you need. You go through the approval, closing, and funding process for construction funds only.

As you near completion, you’ll need to convert the construction loan to a permanent loan. This requires approval, closing, and funding a second time. The proceeds from the permanent loan pay off the construction loan.

This is ideal for the buyer that doesn’t have concrete house plans in place, may want changes throughout, and/or wants to wait for the perfect permanent mortgage.

3. Renovation Construction Loan

This loan works for buyers (or homeowners) looking at a fixer-upper. If you’re buying the home, chances are it won’t pass an appraisal as-is, but you can wrap the renovation costs into the loan, basing the loan amount on the after-repaired home value.

If you already own the home, you can refinance the home with the renovation costs included. Just like the fixer-upper, lenders base your LTV on the after-repaired home value based on the renovations you propose.

Choosing the Right Builder

There’s one unique step in the construction loan process in Colorado – choosing the builder. While I know you want the right builder based on your specs, the lender has a say in the builder too.

Because the builder’s reputation and ability to complete the project as promised plays a large role in the construction process and whether you can pay the loan back, lenders have a vested interest in the builder.

Before you start the loan process, I recommend shopping for a builder. You should have at least 3 estimates from different builders. This gives you a chance to compare your options and see what each builder offers.

Remember, the lender has the final say whether a builder is satisfactory or not. As you vet builders, do the following:

• Ask for references
• Assess other work the builder has done
• Ensure plans meet all local requirements
• Proof insurance
• Proof of license

The lender will need all of this, plus final blueprints. Along with the blueprints, lenders need a detailed budget breakdown from the builder. What materials do they need and what are the costs? What is the cost of labor?

Finally, they need an executed contract that shows the detailed timeline for each phase as well as finalized start and completion dates.

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