|
Chapter 7 |
||
|
CONSTRUCTION
AND LOT LOANS CONSTRUCTION
LOANS: For
many, the American dream begins with the land and the blueprints – the
drive to build their own home, not just buy it.
Building new allows you to create a home truly suited to your
client’s needs, especially if resale homes cannot be found to satisfy
the needs of their family.
To help them realize this dream, you
may need two (2) loans: an interim construction loan and a permanent
loan. Check
with your lender for help as various Lenders service different
products. The
Power of One Closing Buy
the land. Close your construction loan. Secure permanent financing.
Lock in an Interest Rate. Interest
Rates may rise, but you can protect the client with long term locks, plus
a wide selection of permanent financing options. You can either increase
or decrease the loan amount once
construction is finished on the new home (or even extensive remodeling of
an existing house) or switch to a different loan product. Advantages
of the Double Close
Construction Loan Transaction ·
Flexible
end loan financing options - find a permanent loan product that fits the
situation. ·
Extended
interest rate locks available - lock in your loan at a lower rate, if
rates begin to rise, the client is
protected. ·
Do
a Cross Collateralization with
the equity that they have in their current home
and make only one move. A
Cross Collateralization may eliminate a Bridge
Loan. A lien is placed on the current home for the equity needed
for
the down payment and closing costs. How
does the Construction/Permanent Loan work? ·
Apply
with any approved lender. ·
The
construction and /or permanent loan will be reviewed at the same time. ·
The
construction loan closing will take place soon after the approval.
The
client
will ·
As
each stage of the construction ends, the lender will approve a release of
the funds ·
Once
the home has passed its final inspection by the appraiser and the local
building IMPORTANT
THINGS TO KNOW ABOUT A CONSTRUCTION LOAN: ·
A
Draw Schedule will be
provided prior to loan closing. The
Draw Schedule details the amount available to be disbursed and the
requirements that need to be met throughout the construction process. All
draw schedules need to be accepted by borrower and builder. ·
A
Construction Loan Administrator (CLA) will be assigned to aid the borrower
and builder during the construction process.
The CLA is available for any questions regarding the construction
process and also schedules Bank inspection and manages the disbursement of
loan funds. ·
Prior
to the first disbursement, the Bank will need a copy of the building
permit, wall check survey, well log (if applicable) and evidence of
builder’s risk insurance. ·
All
subsequent draws require a Bank inspection.
They will send out an inspector upon request.
Upon verification of work completed, they disburse funds.
If more than six inspections are needed, fees will be collected
prior to disbursement of the proceeds. ·
Funds
are disbursed for completed work only based on the Bank inspector’s
report. ·
The
Bank generally holds 10% of the construction cost until the house is
complete and all the requirements detailed in the Loan Commitment Letter,
Residential Construction Agreement and the Draw Schedule have been met.
Please note that
Lender requirements are often more specific than the local governing
authority. ·
If
construction of the house will not be complete within the initial
construction period, an extension may be granted by the Bank.
A fee will be imposed to extend the loan.
This fee may be paid at the time of extension or added to the loan
payoff. Extending
the term of the loan may compromise the ability to modify to permanent
financing if the construction period exceeds twelve (12) months. ·
Construction
Loan payments are interest only
based on the outstanding principal balance.
The borrower will receive a bill approximately fifteen (15) days
before payment is due. ·
Principal
reductions may be made at any time without incurring a penalty.
However, those funds will not be available to redraw at a future
date. ·
It
is important to lock in the rate on the permanent loan near the end of
construction to avoid additional fees
that may be incurred if the lock expires before conversion to permanent
financing. It is wise to
coordinate this date with the aid of the builder, Bank’s CLA and client
borrower. ·
Modification
is the process of converting construction financing into permanent
financing. All the
requirements of the Loan Commitment Letter, Residential Loan Agreement and
Draw Schedule must be met. At
modification the borrower will be required to pay into a tax and insurance
escrow, as well as interest due on both loans and other costs. COMMONLY
ASKED QUESTIONS: The
following information is intended to assist you or your client with the
construction loan process. It
is not intended to be all-inclusive. If
you or your client have additional questions or need clarification, please
consult with your mortgage banker. ·
What
do I need to apply for a construction loan? In
addition to the standard net-worth assessment, liability and employment
documentation, you will need to provide plans, specifications and a
builder contract. If your
client will be the General Contractor the Bank will need a cost breakdown
plus the subcontractor’s bids/fixed price contracts. ·
What
is required before funds can be advanced?
Prior to disbursement of funds, you will need to provide a copy of the
building permit, well ·
What
fees are associated with the construction process?
The Bank collects a fee at settlement which allows for up to 6 inspections
and modifications ·
Can
funds be re-advanced?
You may make principal reductions at anytime, but those funds will
not be available
to be ·
When
is private mortgage insurance required? Typically,
private mortgage insurance (PMI) is required on the permanent loan when
the down payment is less than 20%. Typically
it is not required during the construction loan process. ·
Can
I be my own builder? The
goal is that the house is completed on time and on budget.
If your client possesses the necessary skills to do so, subject to
the Bank’s approval, they
may act as their own General Contractor. ·
Who
is the primary contact during the construction process? Once
the loan is approved, a Construction Loan Administrator (CLA) will be
assigned to aid during the construction process.
The CLA is available for any questions you may have and will aid
your client and their builder in the scheduling of inspections and the
disbursement of funds. ·
What
is the draw schedule? The
draw schedule details the amount available to be disbursed and the
necessary requirements to be met throughout the construction process.
Generally, there are 7 draws for a stick-built house and 4 draws
for a modular house. You will receive a draw schedule prior to closing the
Construction Loan. ·
What
is the standard method for disbursing funds? Usually
reference is made to comply with the contract between the Builder and the
Borrower. ·
How
does the draw process work? The
Bank sends out an inspector upon your builder’s request for the advance
of funds. Upon verification of
work completed, funds will be disbursed. ·
How
are payments calculated? Payments
are interest-only based on the outstanding balance.
Payments begin one month following loan closing and continue
monthly thereafter. A bill is
mailed to your client fifteen (15) days before the payment is due. ·
When
should the client lock in the permanent rate? It
is important to lock in close to the end of construction to avoid fees
that may be incurred if the lock expires before converting to the
permanent loan. It is wise to
coordinate this date with the aid of the client, builder, CLA, and
Mortgage Banker. ·
What
is modification? Modification
is the process of converting the construction loan into a permanent
loan. ·
What
do I need to do to modify? Before
modification the client must meet all the requirements detailed in the
Commitment Letter and Draw Schedule provided by the Bank. ·
When
are escrows collected? Escrows
for property taxes and insurance are generally required when the client
converts to a permanent loan. You
must anticipate the escrows associated with the permanent financing. ·
May
the borrower pay down on the loan at any time without
penalty?
Yes. The borrower may
make principal reductions anytime without incurring a penalty. ·
When
can the client move into their new home? Generally
this takes place after a Use and Occupancy Permit (U&O) has been
issued by the county officials where the home is located and loan
requirements are met. ·
What
if the home is not complete and the loan has matured?
As soon as you think this situation may be a possibility discuss it
with your client and the Bank since they may be able to extend the
maturity date with the completion of a Note Modification Agreement and
payment of an additional fee.
LOT
LOANS: Lot
Loans
are available which allows you to purchase a lot for the eventual
construction of a residence. This
product is intended for buildable lots, so be certain that all utilities
(gas, telephone and electric) are available and that Well and Septic
approvals are already in place. It is Lender specific as to the loan requirements to purchase a lot, so please check with your preferred Lender. Typically rates for these loans are higher than market rates for regular permanent mortgages because Lenders view an unimproved building lot as a greater risk. Down payment requirements vary greatly from Lender to Lender, but are often in the range of 20 – 30 % of the purchase price. Check with various lending sources for specific requirements of their Lot Loan programs. “Do
Better Business…. The Carroll Way!”
August
29, 2008 |