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Construction/Permanent Loan Disclosure
Construction Perm Loan
Construction/Permanent loan disclosure The following is provided to assist construction/perm borrowers to understand the construction/permanent loan process and to confirm your agreement with the terms of the construction/permanent loan.
Definition of Construction Perm Loan
A construction /permanent loan is a combination construction loan and permanent loan with one loan closing. The major advantage of this loan is that it eliminates the need for a short-term construction loan. This may mean a savings in duplicate closing costs for the borrower. Only interest is charged during the construction loan and the loan does not begin amortizing until the construction loan is terminated and the permanent loan takes effect.
The decision on what builder to use is up to each borrower. However, the lender must approve all builders. While this requirement for builder approval may indirectly accrue to borrower's benefit, it is not a guarantee of the builder's performance.
The lender approval will be based on our assessment of the builder's financial condition, credit history and proven history of satisfactory performance.
In the event a builder fails to build the home as agreed, files for the bankruptcy or in any way defaults on the obligations detailed in the Construction/Permanent Loan Agreement, the borrower will still be held liable to repay the loan.
Required Documents for Processing the Loan Application
1. A signed contract, executed by the borrower and the builder, stipulating a firm price and providing for the responsibilities for both parties during the construction period. The contract shall contain a fixed amount for cost of construction, the payment terms for deposit, progress draws and final payment. The contract shall also contain the estimated start and finish dates, how payments will be made, and terms of default of the contract. The contract shall have attached a complete cost breakdown for the house to be built.
2. One complete set of plans and specifications, including plot plan.
3. A boundary survey with an accurate legal description of the land to be mortgaged, reflecting any easements, setback lines, flood zone statues, public access, and showing the location of the proposed house on the lot. If the property has an individual water supply, the well must be showing on the survey. If completed construction is found to violate flood zones, flood insurance will be required. If the community does not participate in the FEMA program, the loan cannot close.
4. A completed and signed loan application, credit report, income verification, and other documents as required in the processing of a mortgage loan application.
Loan Approval Process
Construction/Perm loan applications are processed in the same manner as other loans. During this period, the lender will examine the construction contract, the plans, the specifications and the cost breakdown to determine whether they are in conformance with the lender lending policies. The value of the completed house will be determined by a lender selected appraiser and will be based on the land value, the cost to build and site improvements. The appraiser will also indicate the cost to build in accordance with professional estimates. The cost to build indicated on the cost breakdown must be in substantial agreement with the appraiser's estimate of the cost to build.
However, the lender's approval of the plans is solely for benefit to determine whether the home will be acceptable collateral for the loan, and the lender approval is not in any way a guarantee that the house meets local zoning, building codes, sound building practices or any other requirement pertaining to the adequacy of a home.
After final loan approval and satisfaction of the conditions of the commitment, the loan will be closed prior to the start of construction. It is important that the construction not commence prior to the loan closing. A Notice of Commencement will be filed by the lender upon closing of the loan. This Notice of Commencement will serve notice to all sub-contractors that are working on the job as to the owner (the borrower) and the lender.
Borrower's cash equity must be paid at the closing of the loan. These funds will be deposited in an LIP (Loan in Process) account and will be disbursed, based on the normal draw schedule, as construction progresses. All of the borrower's funds will be disbursed before any loan proceeds are disbursed.
Construction of the home must commence within 30 days of initial closing.
Inspection and Disbursements
-Prior to each draw, an inspection will be made by an authorized inspector to justify disbursement of the requested draw.
-Inspections are conducted to determine the percentage of completion and are undertaken to ensure that our security is adequately protected, not to assist you in determining the quality or value of the work, or that stage of completion. Notwithstanding the fact that you may be charged an inspection fee, inspections do not give rise to an implied contract or create a duty to you as a home purchaser.
-The borrower will pay a fee at closing for all inspections. This fee is usually $50.00 per inspection or a total of $300.00. Homes greater than $250,000 in value may require more or more complex inspections and are subject to additional fees.
-Before each draw is funded all sub-contractors that have filed Notice to Owner affidavits will be required to sign a Release of Lien or Partial Release of Lien affidavits. The builder will be required to sign a No Lien Affidavit. These documents help assure that no liens are filed on the property.
Prior to any disbursements of funds, the lender must have the following exhibits in file:
1. Boundary Survey:
2. Current Builders Risk Insurance; and
3. Acceptable Title Insurance Commitment (Binder)
In addition, prior to any disbursements of funds subsequent to the disbursement of lot draw funds, we must have the following exhibits in file:
4. Foundation survey; and
5. Soil Treatment Certificate
6. Flood determination based on new elevation. If flood insurance is deemed to be required, a flood insurance policy will be required at this time.
7. Architectural Review Committee approval. When the property is in a deed-restricted community, an approval of the plans by the Architectural Review Committee will be required.
Generally, builders request an amount equivalent to ten percent of the construction loan be disbursed at closing. This money may come from the borrower or the construction fund but the combined total of borrower payments to the builder and the lender disbursements will not exceed ten percent. Whatever amount is paid to the builder at closing from the construction loan fund will be deducted from the builder's first draw.
Any fees associated with the administration of the construction loan will be collected at the closing of the loan.
An inspector chosen by the lender will make each inspection to determine of the construction has made satisfactory progress to justify disbursing the funds. The inspection does not guarantee that the quality of work will meet with the borrower's satisfaction, nor does the lender assume the responsibility to discover or inform home purchaser of defects in construction.
The purpose of the inspection is to assure that the work has been completed in accordance with the draw request and the work has been completed substantially in conformance with the plans provided. The inspector will measure the gross size of the house and confirm the number of rooms but will not go into further detail.
It is the borrower's responsibility to determine if the work is satisfactory. Borrowers who would like assistance during the construction process should obtain the services of a professional to assist in inspecting the quality of the builder's work.
Request for Inspection
The builder should request the inspection at least two days before the draw is required. The draw will be available within 24 hours of the inspection.
Disbursements will be made in accordance with your Construction Loan Agreement.
Interest During Construction
Interest is charged on the outstanding balance of the construction loan during the construction period. Accrued interest (but no principal) will be due and payable on the 10th day of the month following closing and each month thereafter until the completion of the construction period.
Interest payable will be billed monthly. Payment is due by the 15th of the month. No loan disbursements will be made on loans with past due interest.
Timely Conversion to Permanent Loan
The construction loan must convert to a permanent loan prior to the end of the construction period. Failure to convert before the expiration of construction period may result in additional fees and/or a higher interest rate.
Completion of Construction
At the completion of construction the applicable municipal code inspectors will issue a Certificate of Occupancy if everything meets the Building Code. The lender will then send the Appraiser to do a final inspection. If all work is completed in accordance with the draw schedule, a final disbursement will be made payable to both the borrower and the builder.
Borrowers will be required to establish an escrow account for taxes and insurance at conversion. If the borrower has requested waiver of escrow, any associated waiver fees will be paid at the construction loan closing.
At the completion of the construction period indicated in your note, your loan will begin amortizing. The date that your first regular payment is due is indicated on your note. Please note that you will be billed for interest on the fifteenth day of month after completion of your construction. For example, if your construction was finished on the 12th of April and your first payment for your permanent loan is June 1, you will be billed for construction loan interest for the entire month of April.
In most cases your construction will be completed before the end of the construction period. You will be charged for construction loan interest up until the first day of the month preceding your first regularly scheduled permanent loan payment.
If you choose to float your permanent rate through construction then you must lock on or before the Certificate of Occupancy is issued. Your rate will be locked at the current purchase rate that corresponds with your approved loan program. As indicated daily on the mortgage loan rate sheet.
A prepayment penalty will be imposed if the loan is repaid or refinanced prior to conversion.
Attached to this disclosure are sample copies of a Draw Schedule and a Construction Loan Agreement Please read these and ask your Loan Officer if you do not understand anything in this disclosure or the attachments.
By signing below you are indicating that you understand the information provided herein and in the disclosures. This document and attachments shall govern the method used to administer all construction loans. Verbal representations will not honored if they are in conflict with this document and attachments.
Date: ________________ ___________________________________
Date: ________________ ___________________________________