RSSConstruction loans can be very complex and usually contain many hidden lender requirements that may burden for the owner and the builder. It is therefore important to ask as many questions as you can about your lender’s policies and procedures regarding the details of the construction loan and permanent loan.
The list below touches on several key points that can be deal breakers for you and your builder. Determine the answers to these questions and discuss your findings with the builder to assure the builder will work with the lender.
- Borrower(s) are required to pay the entire portion of the down payment up front prior to any funds being disbursed from the loan proceeds.
- Borrower and builder must have a reasonable budget completed prior to finalizing theConstruction/Permanent loanprocess and deciding on a loan amount. If all costs are not finalized, borrower must be aware of those items and the potential dollar amount those items might exceed the budget.
- Change orders are to be paid by borrower at the time of the change order from the borrower’s own funds. In other words, if it’s not in the original budget, it will not be funded by lender.
- Construction of the home is to commence within 30 days of initial closing.
- All draws will be disbursed to either the builder or the owner as determined by the owner.
- The final construction loan disbursement will be made jointly to the builder and the borrower. All draws will disbursed in accordance with the lender’s draw schedule.
- At the end of construction the construction loan will be modified (converted) to a permanent loan. Modification may carry additional fees. How much are those fees?
- The interest rate on the permanent loan will not be locked until acertificate of occupancy for the home has been received.
- A 1% prepayment penalty will be imposed if the loan is repaid or refinanced prior to conversion.
- The loan amount cannot be increased or decreased during the term of the construction loan.
- The loan will be re-underwritten if the construction takes more than 12 months.
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