Fannie Mae: Construction Loan Options And Opportunities

Fannie Mae offers two types of financing for new construction: Single-Closing and Two-Closing Transactions. The Single-Closing option is a popular choice for building new single-family homes as it streamlines the process, allowing borrowers to secure financing for the land, construction, and permanent mortgage in a single loan. The Two-Closing option, on the other hand, allows borrowers to convert their existing construction loans from any lender into a permanent mortgage with Fannie Mae. This gives borrowers the flexibility to shop for the best terms on their construction financing. In addition, Fannie Mae also offers the FHA 203(k) program, which allows for the financing of property repairs and upgrades, providing a convenient option for homebuyers looking to purchase a house in need of repair.

Single-closing transactions

In a single-closing transaction, the lender will be responsible for managing the disbursement of the loan proceeds to the builder, contractor, or other authorized suppliers. The loan documents specify the terms of the permanent financing, and the construction loan will automatically convert to a permanent long-term mortgage loan upon completion of the construction.

Loans that combine construction and permanent financing into a single transaction cannot be purchased by Fannie Mae until the construction is completed and the terms of the construction loan have converted to the permanent financing. The construction loan period for single-closing construction-to-permanent transactions may have no single period of more than 12 months and the total period may not exceed 18 months. Lenders may, when needed, provide an extension to the original period to a total of 18 months, but the documents may not indicate an initial construction period or subsequent extension of more than 12 months. After conversion to permanent financing, the loan must have a loan term not exceeding 30 years (disregarding the construction period).

Two-closing transactions

Fannie Mae supports the new construction market with two types of financing: Single-Closing and Two-Closing Transactions.

Two-closing construction-to-permanent mortgage transactions utilize two separate loan closings with two separate sets of legal documents. The first closing is to obtain interim construction financing, which may include the purchase of the lot. The second closing is to obtain permanent financing upon completion of the improvements.

Fannie Mae does not purchase construction loans (the first closing); however, it does purchase loans that were used to provide permanent financing. The lender that provides the permanent long-term mortgage may be a different lender than the one that provided the interim financing. The lender must underwrite the borrower based on the terms of the permanent mortgage.

In a two-closing transaction, the borrower will have been through two closings (one closing on the construction loan and the second closing on a mortgage). This flexibility allows borrowers to shop for the best terms on their construction financing without having to commit to terms with their mortgage lender upfront.

Construction-to-permanent financing

Fannie Mae supports the new construction market with two types of financing: single-closing and two-closing transactions. Single-closing transactions are when the construction loan is converted into a permanent mortgage in one closing. Two-closing transactions are when the borrower already has a construction loan that they need to convert into a permanent mortgage in a second closing.

For single-closing transactions, the borrower may not be the owner of the lot at the time of the first advance of the interim construction financing. For two-closing transactions, the borrower must have held the legal title to the lot for at least six months prior to the permanent loan closing to be eligible for a cash-out refinance.

Requirements for a single close construction loan

Fannie Mae supports the new construction market with two types of financing: Single-Closing and Two-Closing Transactions. Single-closing transactions are only for purchase or LCOR. The loan cannot be delivered to Fannie Mae until the construction is completed and the terms of the loan have converted to permanent financing.

A Single-Close Construction Loan combines the construction loan and permanent mortgage into one single loan, reducing paperwork and requiring only one set of closing costs. This type of loan provides short-term funding for the construction phase, which then converts seamlessly into a permanent mortgage upon completion of the project.

The application process for a Single-Close Construction Loan is thorough, requiring proof of income, credit information, DTI ratio, and assets. Credit score requirements vary; FHA and VA loans typically need a minimum of 640, though 580-640 might be acceptable with AUS approval. Conventional loans generally require a score of 680 or higher.

To qualify for a Single-Close Construction Loan, you must own or be purchasing the lot you intend to build on, and the Loan-to-Value (LTV) ratio must be 95% or less. You'll also need to provide home plans and specifications for appraisal purposes. A home inspection is also required upon completion.

Interest rates for single close construction loans

Fannie Mae supports the new construction market with two types of financing: Single-Closing and Two-Closing Transactions. Single-close construction loans, also known as one-time close construction loans, combine the construction loan and permanent mortgage into a single loan. This simplifies the process of building a new home by reducing the number of applications, paperwork, and closing costs.

Interest rates for single-close construction loans vary depending on several factors, including the borrower's credit score, the desired building location, the loan type, and the loan amount. Borrowers with higher credit scores may be able to secure lower interest rates. Additionally, the location of the construction project can impact the interest rate offered by lenders due to varying market conditions and risks associated with different geographical areas.

Single-close construction loans typically offer fixed interest rates, which means the rate remains the same throughout the life of the loan. This provides stability and predictability for borrowers as they know their monthly payments will not fluctuate with changes in market interest rates. However, it is worth noting that interest rates can be locked for up to 12 months during the construction phase, and borrowers may have the option to adjust the rate once within 30 days of the home's completion to align with the current market rates.

VA single-close construction loans, backed by the Department of Veterans Affairs, often feature lower interest rates for veterans, active military members, and eligible spouses. Similarly, FHA single-close construction loans, backed by the Federal Housing Association, may offer competitive interest rates for borrowers with lower credit scores. These loans typically require a minimum credit score of 580, but scores as low as 500 may be considered with a higher down payment and a capped loan-to-value (LTV) ratio.

Frequently asked questions