A roundup construction loan, also known as a “construction-to-permanent loan” or “one-time close” loan, is a financing solution that combines the construction loan and the permanent mortgage into one single loan. This type of loan simplifies the financing process for home construction by allowing the borrower to avoid multiple loan applications, approvals, and closings.

Key Features of a Roundup Construction Loan:

1.  Single Loan Process:
•   The borrower applies for one loan that covers both the construction of the home and the permanent mortgage. This eliminates the need for separate loans and closings, saving time, effort, and closing costs.
2.  Interest-Only During Construction:
•   During the construction phase, the borrower typically makes interest-only payments based on the amount that has been drawn (or disbursed) for construction. This reduces the payment burden while the home is being built.
3.  Draw Schedule:
•   Funds are released in stages as construction milestones are reached. Each draw is based on the completion of specific phases of the construction project, such as foundation, framing, plumbing, etc. Lenders often require inspections before each draw to ensure the work is proceeding as planned.
4.  Conversion to Permanent Mortgage:
•   Once construction is complete, the loan automatically converts into a permanent mortgage. The borrower then begins making regular principal and interest payments based on the terms agreed upon when the loan was originally closed.
5.  Locked-In Interest Rate:
•   Some lenders allow the interest rate for the permanent mortgage to be locked in at the time the construction loan is approved. This can protect the borrower from rising interest rates during the construction period.
6.  Simplified Closing Process:
•   Because the loan is a single transaction, there is only one closing process, which reduces the closing costs and paperwork typically associated with separate construction and permanent loans.
7.  Down Payment Requirements:
•   Roundup construction loans generally require a down payment of 20% to 25% of the total loan amount, though this can vary depending on the lender, the borrower’s creditworthiness, and other factors.
8.  Flexible Terms:
•   The terms of the permanent mortgage (e.g., fixed-rate or adjustable-rate, 15-year or 30-year term) are typically determined when the loan is initially approved, allowing borrowers to choose a structure that fits their financial goals.

Advantages:

•   Convenience: The main advantage of a roundup construction loan is its convenience. By combining construction and permanent financing into one loan, it simplifies the process and reduces the need for multiple loan applications and closings.
•   Cost Savings: One closing means only one set of closing costs, which can result in significant savings.
•   Rate Protection: Locking in the interest rate early on can provide protection against potential rate increases during the construction period.

Disadvantages:

•   Higher Initial Requirements: Since it’s a single loan, lenders may have stricter qualifications for credit, down payment, and overall financial stability.
•   Potential for Higher Costs: If the construction project encounters delays or cost overruns, the borrower may need to renegotiate the loan or bring additional funds to the table.

Ideal Use Cases:

•   Custom Home Building: Ideal for borrowers planning to build a custom home on a lot they own or are purchasing.
•   Simplifying the Financing Process: Best for those who want to avoid the complexities of separate construction and mortgage loans and prefer a streamlined process.

A roundup construction loan is a practical and efficient financing option for borrowers looking to build a new home while securing long-term financing upfront. It offers the convenience of a single loan, with interest-only payments during construction, and automatically converts to a traditional mortgage upon project completion.

---