Building a Home: The First Closing
It turns out when you do a construction-to-permanent loan, you’re actually going to do two closings. The first closing is to set the terms for the hypothetical home; the second closing sets the terms for the newly built home. If you get to the first closing, you can relax because your home is going to get built.
Our hypothetical home appraised for what we were asking to borrow, which was good. But a lot can happen between design and build, namely a falling real estate market. The bank will try to write a loan to conforming standards, which means they’ll be able to sell it down the road if they wish. If the home loses value while it’s being built or the bank can’t write it to conforming standards, they may have to keep the loan on their books indefinitely. This is known as a portfolio loan, or a loan the bank won’t or can’t resell.
Our initial loan was set up as a portfolio loan. That way, if anything with the home valuation went wrong after the build, the bank would be protected. When I say protected, I mean we would be stuck paying 6% when the prevailing 30 year mortgage rate was 3.62%. Fortunately, we were underwritten to conforming standards so we’ll likely get a rate much lower than 6% at our second closing (when the home is completed), also known as “loan modification”.