Buyers can obtain financing much cheaper than builders, so they are usually asked to come up with financing for the construction of their custom homes.

With normal financing, if you lose your job, suffer a medical catastrophe or just have a change of heart, you can back out of the sale and all you'll lose is the deposit you gave the builder. However, all is not so simple with the construction-to-permanent (C2P) loan - the favored form of financing in the custom home market. Here, only one closing is involved, so there's only one set of expensive settlement costs. Sometimes known as "single-close," "one-time close" or even "all-in-one" loans, C2P mortgages start out as construction loans and then convert automatically to permanent financing when the house is completed.

Unfortunately, with single-close loans, there's no changing your mind after construction starts -- for any reason.

So, you should be extremely careful in choosing your contractor and be sure that he can perform as expected. Not all lenders have checks and balances in place to protect their interests or yours. But, even if your lender goes over the builder's references and bank accounts, it's your neck that’s on the line if/when something goes wrong.

Some lenders don’t do enough to make sure that contractors pay their bills. Therefore, it's up to you to make sure that signed releases are collected from subs and suppliers every time the builder asks for money. Otherwise, you could be hit with a mechanics lien.

In fact, you'd be wise to double-check that the checks the builder writes have been deposited and have actually cleared before going on to the next payment. It's only after the money becomes "good funds" in this manner that the right to file a lien is extinguished.

Currently, there are no set standards in the C2P loan industry. Needless to say, the inconsistency & variety of loan rules are exasperating to both builders and their buyers alike.

For example, one lender might want to review the builder's banking references while another may not. Or a lender might want to document a builder's licenses, check over lien releases or the "draw" or payment schedule, or even take a peek at gross sales -- but others may not.

Once some order is established, however, an increasing number of production builders are also expected to turn to the C2P loan product.

And, although they are flush with cash right now, builders would like to see the same standardization and stability brought to construction lending that Fannie Mae helped create in the primary lending sector. For its part, Fannie Mae is taking steps towards making a market in construction lending, saying its routine involvement could help bring housing within the reach of more people. Currently, it is in the process of developing back-office support to work with construction lenders on underwriting and servicing ADC (acquisition, development and construction) loans. And it is working with the National Association of Home Builders (NAHB) and others to develop standards for loan documentation, underwriting and approval requirements, and servicing processes.

Also, some four years ago, the National Association of Residential Construction Lenders was formed to bring standardization to the fragmented C2P marketplace. NARCL's goals are to improve awareness of the product, increase its availability, improve customer service, decrease risk and improve profitability. Toward those ends, it is developing standards for the benefit of builders, lenders and buyers.

In another recent development, as of March 31 st, 2006, federal banking regulators are now requiring large banks and banks that do a large volume of business in residential production loans to report more details on their commercial and construction lending programs. This should provide proof of the safety of this type of residential housing lending product, which is considered crucial to developing an after market for ADC (acquisition, development and construction loan) funding. Fannie Mae says home builders will require some $4 trillion in ADC funding just to build the single-family houses they'll need to erect over the next decade to keep up with demand,. And news on the street is that Fannie Mae is hoping to convince government officials to allow the company to purchase and securitize ADC loans on all properties as a way to break into high-cost markets.
The NAHB estimates that a secondary market for ADC funding would reduce the cost of a $200,000 house by $3,000 and would make ADC loans permanently available to builders, even in hard times, just as money for However, so far HUD has adamantly insisted that the mortgages on the houses that are eventually built should be at or under the conforming loan limit. Currently (May 2006) that ceiling is $417,000 - but it tends to rise every year in lockstep with home prices.

So, production builders/developers may not get everything on their wish-list. However the standardization process that has been initiated can be expected to make life easier for custom home builders and their clients.