Construction Perm Program Information and Description
The following is an explanation of construction permanent financing for the construction of your new custom home. We will show you the advantages of utilizing this financial tool to build your next home.
A construction permanent loan is a line of credit from which your builder draws on to build your new home. It is usually structured into 6 draws. Upon the completion of each phase of construction, the builder will call for a draw, or disbursement of funds. The bank in turn will send out an inspector to ensure that your home is complete to the designated level before issuing these funds to the builder. The loan progresses in this fashion until the home is complete. At this point the bank will hold back 10% of the construction amount until the county issues the use and occupancy permit, or equivalent, and the builder supplies them with other necessary documentation. Once the builder receives this final draw, he is out of the transaction and it is time to convert/modify your loan to the permanent financing. There are a multitude of products available for this permanent financing.
There are several advantages to this type of financing. The first is the tax savings on closing costs. Transfer tax is a significant part of your closing cost and is required by state and county. Transfer tax is assessed on any real property that transfers title at the time of closing. With a construction loan you are closing on the land prior to construction of your new home. Therefore, the transfer tax is assessed on the sales price of the lot and not on construction cost. This may save you thousands of dollars versus purchasing a completed home from a builder.
The second advantage is the potential tax benefit from the interest paid on this loan during construction. (Always consult your tax advisor). During construction you pay interest only on the amount that is drawn out at any given time. You will not pay on the entire loan amount over this period.
The third advantage of a construction to permanent loan is the lower sales price you will pay for your home. If a builder uses a commercial line of credit to build your home, selling you the finished product, they will roll those costs into the sales price. The consumer rate you receive on a construction permanent loan is also typically lower than a commercial rate therefore adding additional savings.
Construction permanent financing is a tremendous financial tool in the construction of your home and your financial well being. It is a tool that can be tailored to your individual needs allowing for optimal returns. It is important that you work with a Bank and mortgage professional that has an expertise in this unique type of financing.
Contributed by Rob Reilley, Susquehanna Bank