CONSTRUCTION-TO-PERMANENT LOAN
Looking to build a dream home or a vacation/second home
...or renovate your existing home?
Financing the construction of your dream home is one of the most important decisions that you will have to make. We can answer your questions and your builder's questions, so your project keeps moving smoothly from groundbreaking to housewarming. Our Construction-to-Permanent Loan is a one-time close loan. This means with one application, you get all the financing you need in one easy process. One-time close means "one loan". period! From start to finish. You sign one set of loan documents that covers both the interim construction phase and the permanent loan phase. This eliminates the need for multiple loans and all of the extra fees that would go with that. With this single loan, you can purchase the land for your home and complete the construction. When the construction of your new home is complete, your loan converts to a permanent mortgage loan without going through the mortgage process again and paying those additional closing costs. You will have the option of choosing from several loan products (fixed and adjustable rate mortgages - ARMS), and have rate lock options that offer a variety of features. The construction period may vary in length from 6 to 18 months.
 How does the construction loan process work?
The Construction-to-Permanent Loan process is very similar to the process of a standard purchase or refinance transaction. But, unlike a purchase transaction for an existing home, a Construction-to-Permanent Loan involves determining the value of a home that is not yet constructed.
To assist the appraiser and the lender in determining the future value of the home, information must be provided on the planned improvements, what materials will be used and the total costs to complete the construction. Additionally, The lender must evaluate the building professional who will oversee the work to ensure that he or she has the experience to complete the proposed construction.
For a Construction-to-Permanent Loan a list of documentation to fit your specific needs will be provided to you. However, the following documentation is generally required (in addition to standard credit documentation):
Final Plans and Specifications. These consist of a legible set of architectural drawings (building plans) prepared by an architect and approved through city or county planning. They typically include a floor plan showing all dimensions, a foundation plan showing all dimensions, outside elevations of the building, electrical and plumbing details, as well as other details of the actual planned construction.
Detailed Line Item Cost Breakdown. This is generally prepared by the building professional and should include the hard costs (lumber, bricks, mortar) and the soft costs (permit fees, engineering fees, architectural fees).
Construction Contract. This is the agreement between the building professional and you that details the planned construction project, the amount of time required to build the home, and the agreed-upon cost. Your construction term should be at least as long as your construction contract.
Description of Materials. This information describes the materials to be used in the construction of the home. For example, wood shingle roof or lightweight tile; redwood siding or cedar shingle.
Completed Construction Loan Budget Worksheet. This form is used by your Loan Officer to bring all the costs together, along with all the items that you have paid for in advance. By using this form, your Loan Officer will be able to determine the maximum loan amount and the amount of equity or cash to close required by you. Your Construction Loan Officer will complete your budget for you.
Builder Statement. This form ensures that the building professional is experienced, has a proven track record and will be capable of performing under the terms of the contract.
General Contractor License. A copy of the building professional's license (not required in all states) should also be included with the Builder Statement.
What makes up the construction project costs?
There are a number of costs that go into building a new home. These costs make up the items used to build your construction loan budget.
Soft costs (off-site and indirect costs). Permit fees, engineering fees, architectural fees and other costs associated with building the home but are not directly a part of the actual construction costs. Many times, you may have already paid some of these costs up front. If so, these paid items may be considered as "equity", if you can document the cost with a bill and a canceled check or a paid receipt.
Hard costs (lumber, bricks, mortar). The actual cost of construction covering all materials and labor associated with the building of the home. Typically, you will enter into a contract with a building professional to build the property. Like a purchase contract for an existing home, this contract sets forth the work to be done and the costs associated with that work.
Closing Costs. These are costs associated with the closing of the loan, such as title costs, loan fees, discount fees, inspection fees and appraisals.
Land value/house cost. If the property was purchased within the past 12 months, the purchase price of the land will be used in determining the site value. If the property has been owned for more than 12 months, the appraiser's estimate of the site value will be used. A copy of the HUD-1 for the purchase of the land must be provided if owned less than 12 months.
Loan-to-Cost (LTC). The maximum loan amount is based on total project costs, and is determined by using the maximum LTC. The following is an example of the LTC calculation using the same loan information in the Interest Reserve Formula on the next page.
Contingency Reserve. A lender required reserve account to cover unforeseen cost overruns in the construction of the home. A required reserve equal to 5% of the hard costs will be established in a Contingency Account. (Your building professional may hold a reserve other than what the lender requires.)
Interest Reserve. An account is established
to pay the estimated interest
costs during the construction of the
home. This way you do not have to
make out-of-pocket payments during
construction. If the Interest Reserve is
depleted during construction, you will
have to make interest payments.
The formula for the interest
reserve estimate is:
Interest Reserve = Monthly Estimated
Interest × Construction Term
Loan expense increases as your project completes.
The interest reserve calculation assumes
interest on the loan as it ramps up. Individual
projects may vary.
What insurance is required with a construction loan?
During the construction of your home, you
have additional risk. Therefore, insurance
requirements on a construction loan are more
complex than a standard loan.
Course of Construction Casualty Insurance: This policy is in the form of an "all risk" policy
with fire, extended coverage, builder's risk,
replacement cost, vandalism and malicious
mischief insurance coverage. You should be
named as insured with the insurable value
equal to the replacement cost of the improvements
or the loan amount, whichever is lower.
The lender must be named as the loss payee
under the policy. Once the improvements are
completed and the permanent loan phase
begins, the course of construction policy is
usually converted to a standard "all risk" homeowner's
policy. Contact your homeowner's
insurance agent for additional information.
General Liability Insurance: This is a comprehensive general policy or included
as a broad form liability endorsement. You or
your building professional can provide this. If
you provide the insurance, a minimum amount
of $300,000 for each occurrence is required,
extended to both property and personal injury. If
your building professional is providing the insurance,
a comprehensive general policy of at least
$1,000,000, or a policy including a broad form
liability endorsement is required.
Workers' Compensation Insurance: This insurance covers the building professional,
subcontractor or others who will be
working on the subject property. The building
professional typically provides this policy, thus
the building professional should be named as
the insured. In states where Workers' Compensation
Insurance is not required or you are acting
as your own building professional, a waiver
is required. You will need to sign an acknowledgment
that you do not have the insurance or
that you will verify all subcontractors have the
appropriate coverage.
Flood Insurance: Flood insurance is mandatory on all loans
if any portion of the home lies in a specified
Flood Zone. We will provide you with
your Flood Zone during the loan application
process. If it is determined that your property
is located in a Flood Zone, contact
your homeowner's insurance agent for the
appropriate coverage.
Remodeler Loans: A standard homeowner's policy that
includes Workers' Compensation, General
Liability Insurance and Personal Liability
Insurance is required.
Lot Loans: Insurance is not required on lot loans. You
are encouraged to review your current homeowner's
policy for liability coverage that can
be extended to cover the lot being purchased.
How does the construction process work?
Building your dream home begins several
months before you break ground. Understanding
each step of the process, from assembling
your dream home team to planning your
housewarming, and how long it may take, is
crucial to keeping things moving smoothly
without any surprises along the way.
It all begins with knowing your ABCs. You
need an Architect to design your home, a
Building Professional to construct it, and
a Construction Lender to help finance it. You
may also want to use a realtor to find a
finished lot if you do not already have one.
You can assemble your team in any order
you choose. But keep in mind, that each
plays an integral role in the process and
will work together to help make your
vision a reality.
The following Construction Time Line will help you
plan your project. It is based on a 12-month
construction phase. However, all projects
are not the same. Custom homes built from
the ground up, can take anywhere from 6
to 12 months or longer depending on the size
of the home. Larger projects may take
longer. Systems-built homes go up in as little
as three months. These "modular" or "panelized"
homes are custom homes whose major
components are constructed in sections in a
factory and assembled on your lot. Energy
efficient homes comprised of structural insulated
panels and insulated concrete forms also
utilize the systems-built technology.
Where to Build
Location is one of the most important factors
to consider. When selecting a geographic
location, you will want to consider lifestyle,
schools, proximity to work, and accessibility
to the beach, mountains or leisure activities.
There are realtors who specialize in finished
lots as well as individuals and companies that
sell individual finished lots. If you find your
lot, but you aren't yet ready to build, you may
obtain a Lot Loan. This is short-term financing
for the purchase of a residential lot suited for
future construction.
Construction Planning Resources
American Institute of Architects (AIA) is a
professional association of licensed architects,
with a strong commitment to educating and
serving the general public. AIA members in
your area may be found at www.aia.org
National Association of Home Builders (NAHB) is an association representing more than
205,000 residential home building and
remodeling industry members. Known as "the voice of the housing industry," NAHB is
an excellent source of information for consumers
interested in building a custom home.
Visit their website at www.nahb.org
American Society of Interior Designers (ASID) is an association of interior designers and a
resource to you on how to find and choose a
designer in your area. ASID members in your
area may be found at www.asid.org
The Construction Time Line
Phase 1:
- Put your project on paper
- Interview and find an architect
- Interview and find a builder
- Secure financing
Phase 2:
- Loan closing
- Groundbreaking
- Foundation
- Framing
Phase 3:
- Roofing
- Rough Plumbing
- HVAC
- Electrical
- Other mechanical work
Phase 4:
- Drywall and insulation
- Flooring
- Stairs
- Cabinets
- Painting of trim, walls, and ceilings
- Final mechanical work
Phase 5:
- Final sanding and sealing of finished wood
- Carpeting
- Closet shelving
Phase 6:
- Final inspection
- Final close
- Releasing the contractor
- Final draw request
- Construction loan converts into
permanent loan
After loan closing, how does disbursement work?
Closing Your Loan: The initial closing includes: the payoff of
the lot or existing mortgage (if applicable)
and related closing costs, less your required
equity. The initial closing will not exceed the
amount allocated in the Loan Budget Worksheet
for closing costs and/or lot payoff.
Any additional costs must be paid by you at
closing. You must have an adequate down
payment (equity) at the time of closing. Equity
is defined as cash paid towards the lot, construction
improvements (both hard and soft)
and cash paid at closing, if required. If you own
the lot free and clear, you cannot obtain "cash
back" that has been applied to the lot purchase.
Disbursements: Disbursements are made on a reimbursement
basis. You or your building professional are
required to advance funds into the project.
Disbursements will occur over a period of time
based upon the percentage of work completed
on the home each month, as determined by
the lender.
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