Freddie mac construction conversion and renovation mortgage

A construction loan is a short-term loan that covers only the costs of custom home building. This is different from a mortgage, and it’s considered specialty financing. Once the home is built, the prospective occupant must apply for a mortgage to pay for the completed home.

However, there are several other loans available when it comes to home building, from ground-up building to a complete remodel of the entire house. There’s likely a loan out there that’s right for you, whether you’re starting from scratch with a land loan or completely renovating a home.

Construction-Only Loan

This type of loan is short-term and is usually issued for a year. It’s meant to cover only the actual construction period. Like many lenders, Rocket MortgageⓇ doesn’t offer this type of loan. Why? With so many variables like the builder’s cooperation, getting approvals from local municipalities and more, these are considered higher-risk loans.

This means they’re harder to qualify for, and the interest rate will likely be higher than a traditional loan. In addition, if you decide to go this route, you’ll have to pay a second set of loan fees when you apply for a traditional mortgage.

Construction-To-Permanent Loan

Construction-to-permanent loans are a financing option that prospective custom home builders can apply for. Like construction-only, construction-to-permanent financing are one-time loans that fund construction and then convert into a permanent mortgage. During the construction phase, borrowers make interest-only payments.

These types of loans can be much more expensive than traditional mortgages, so if you decide to go in this direction, shop around, compare rates and find the best deal before you pull the trigger. If you’re an active-duty service member or veteran, you may even qualify for a VA construction loan.

Renovation Loan

Renovation loans, also known as FHA 203(k) loans, can be used for home renovation and are insured by the Federal Housing Administration (FHA). This allows borrowers to both purchase and renovate their new home while still making one monthly payment to cover both costs. Conventional loan borrowers may qualify for these loans through Fannie Mae (HomeStyle Renovation) and Freddie Mac (CHOICE Renovation).

Rocket Mortgage doesn’t offer this type of loan. However, Rocket Mortgage does offer a cash-out refinance, which can be a different path to getting home renovations done. With a cash-out refinance, you take a portion of your equity and add what you’ve taken out onto your new mortgage principal.

Other options include a home equity loan or a home equity line of credit (HELOC). No matter what you want to change about your home, there are plenty of options to get the financing you need to start swinging that sledgehammer.

Owner-Builder Loan

Usually when you build a home, there’s a general contractor who essentially acts as head of the whole operation. They make sure the framing people, the tile people, the wood floor people, the painters and so on all work in coordination to get your home completed (ideally on time and on budget).

However, some prospective home builders wish to act as their own general contractor, and some banks offer owner-builder loans just for this purpose. These types of loans generally require the borrower to demonstrate through experience, education and licensing that they have the needed expertise to oversee the home’s construction.

End Loan

An end loan is a traditional mortgage loan that a home buyer or home builder (if you’re building your own home) can apply for after the new home is constructed. Unlike some of the other construction loans previously discussed, these are offered by Rocket Mortgage.

You can get an end loan if construction is complete on the home. One good aspect of an end loan is that the mortgage application for a newly constructed home is the same as it is for any other home. Less complicated is always appreciated when it comes to financing applications.

What is the Freddie Mac One-Time Close Construction Loan?

This FHLMC One-Time Close (OTC) Construction loan is a product that allows borrowers to combine financing for a lot purchase, construction and permanent mortgage into one first mortgage loan. Ideally suited for borrowers who are purchasing new construction.

Updated FHLMC OTC Construction Program overlays and eligibility include:

• Site-Built, Modular and Manufactured homes:
  • Maximum of $150,000 disbursement at closing for land acquisition or payoff.
• Building permits (where required by the jurisdiction):
  • Site-Built and Modular home – applicable building permits to be obtained prior to closing.
  • Manufactured home – applicable building permits to be obtained prior to closing when the initial disbursement is greater than
    $75,000.

FHLMC One-Time Close Construction Loan – The Basics

• Designed to simplify the financing process for new home buyers, eliminating the need to obtain both a construction loan and permanent mortgage
• Single closing, where the borrower pays interim construction financing on an interest only basis during the construction phase
• For Construction-to-Permanent, closing occurs before construction begins
• Max LTV 90% for Site-Built, Modular and Manufactured Homes; Max LTV 95% for CHOICEHome; Max LTV 97% if CHOICEHome is combined with Home Possible or HomeOne
• Closing costs may be financed
• 15-, 20-, 30-year fixed rate available
• No re-qualification once construction is complete (reverification of employment is required prior to converting to permanent financing)
• A single closing reduces closing costs, saving your borrowers money

What are the benefits?

Single Closing Saves Time and Money

With this FHLMC OTC loan, borrowers can secure financing for the purchase of the land, the construction and the home’s permanent mortgage in a single closing. Only one closing means only one set of closing costs, helping save money. It also allows the process to move forward without interruption from potential snags in financing other aspects later on.

No Re-Qualifying

• Once the construction phase is complete, the borrowers do not have to re-qualify for a permanent mortgage since the permanent loan is closed before construction begins (however, reverification of employment is required prior to converting to permanent financing)

Fixed Rates

• Since the permanent mortgage is closed before construction begins, the fixed rates on Conventional OTC loans will not be subject to change during the construction phase or at any point

Who is eligible for a FHLMC One-Time Close Construction Loan?

This Conventional OTC loan product is available to any borrower who meets the minimum qualifying criteria. This includes first time and repeat buyers. Here are the basic requirements for approval:

• Borrower must have contracted with a builder (must be licensed general contractor)
• Borrower must be purchasing the land at closing, or currently own their property
• At closing, after funds are disbursed to cover the purchase of the land, the balance of the mortgage proceeds must be placed in an escrow account to be disbursed as construction progresses
• Amortization of the permanent mortgage must begin no later than the first of the month following 60 days from the date of the final inspection or issuance of the Certificate of Occupancy
• Maximum loan amounts will vary by location
• Minimum FICO of 700 (if LTV < or = to 80%)

Other Programs to Explore

If the FHLMC One-Time Close Construction Loan does not work for a scenario, perhaps one of these programs will better suit your borrowers’ needs:

• FHA One-Time Close Construction, offers the benefits of low money down financing, competitive interest rates and one closing for all financing
• VA One-Time Close Construction, for eligible veterans and active duty military who are interested in building a new home
• Fannie Mae HomeReady, designed to help low- to moderate-income borrowers achieve homeownership for as little as 3% down
• To purchase a home or take cash out through a refinance: FHA 203(b) Standard