FAQ's about Construction-to-Permanent Loans

Q.  What is a Construction-to-Permanent (CTP) Loan?

A.  Often, getting approved for a construction loan can be tricky.  In many cases, two loans are required--one for construction and one for permanent financing.  At Land/Home Financial, we offer a single-close Construction-to-Permanent Loan that combines both construction and permanent financing into one loan in addition to offering a two-close Construction-to-Permanent Loan.  The key point is that for either Land/Home loan option (one or two close), there is one approval that covers both construction and funding.  The difference in the two options deal with closing costs and how the loan is structured with the overriding goal being to meet the financial needs of each individual borrower.

Land/Home Financial's Construction-to-Permanent Loan allows for a construction period of 6 to 12 months.  Other options are also available.  And when your project is complete, the loan simply converts to a permanent mortgage by either modification (single close) or by signing necessary documentation for the permanent loan (two close).

Q.  Besides a CTP Loan, what other costs may be associated with the construction of my home?

A.  In addition to the contract price, it is common for a construction lender to build a contingency reserve into the loan.  This is a specified percentage or dollar amount usually required by the lender in case of unforeseen circumstances that could negatively impact the construction of your home.  The amount required is usually based on a percentage of the contract price, on-site costs or loan amount.

Additional costs will vary, and may include construction loan closing costs and fees and special insurance requirements.  But don't worry; at Land/Home Financial, our Construction-to-Permanent Loan includes on-site costs, off-site costs, closing costs, interest reserve, contingency reserve and lot purchase or value.

Q.  When will I have to make loan payments?

A.  At Land/Home Financial, our Construction-to-Permanent Loan program includes an interest reserve, which means that you will not have any payments out of pocket during the construction period.  We will incorporate an interest reserve account within the loan amount.  Depending on how quickly you use your construction funds, there may be sufficient funds within the construction loan to carry you through the entire construction period.  As each construction project is unique, you will need to discuss your options with your Construction Loan Specialist.  The first payment on the permanent loan will be due on the first day of the month the month after you modify to or close your permanent loan. 

Q.  Will the payments on my construction loan include principal and interest?

A.  Payments are interest only during the construction period, converting to principal and interest payments upon completion of the home and conversion to the permanent loan.

Q.  What will my construction lender need in order to review my loan request?

A.  Remember, you're asking the lender to loan money on your dream.  Your lender will need to see that dream as clearly as you do.  Therefore, in addition to standard credit documentation, your lender will want, at a minimum, copies of the following documents to start the process:

• Final plans and specifications.  These are needed in order to obtain an appraisal.  The manufactured home or modular builder/retailer will provide this.
• Purchase contract for the lot (or Settlement Statement if you've already purchased it).
• Property profile (description of materials).
• Line Item Cost Breakdown from the builder/retailer.
• Builder's/Retailer’s construction contract.
• Copy of Builder's license (if applicable).
• Keep in mind that you need to obtain the necessary building permits for your home (Builder/Retailer will often obtain these).

Q.  When Does My Construction Loan Term Begin?

A.  Your construction term begins on the date that you sign your loan documents for the construction-to-permanent loan.  It is important to know that your Construction-to-Permanent Loan funds are disbursed as your construction project unfolds.

Q.  How Is My Money Disbursed?

A.  At closing, you will sign a Construction Disbursement Agreement that identifies the how and when the funds will be dispersed to the Builder/Retailer.

Q.  How Much Is Available For Start-Up Costs?

A.  To help get your project started, Land/Home Financial will fund all of the off-site (“soft”) costs like permits and titling expenses, any balance for the land purchase (if applicable), and a percentage of the on-site (“hard”) costs to enable start-up of the project.  In order to complete this initial funding, we must have a fully executed Construction Disbursement Agreement form from you and the builder/dealer. 

Q.  Can I Get Reimbursed For Pre-Paid Items?

A.  Pre-paid items that are reflected in your budget and used as your equity contribution are not reimbursable.

Q.  What Are On-Site Costs?

A.  On-site costs are hard costs associated with the labor and materials used for the preparation of the site for the home, including water, sewage and electrical utilities, grading, foundations, driveways, etc.

Q.  What Are Off-Site Costs?

A.  Off-site costs are indirect or soft costs not directly related to labor or materials for construction.  Examples of off-site costs include building permits and impact fees. Off-site costs are normally funded at the closing of the construction phase of the loan. 

Q.  How Does The Disbursement Process Work?

A.  Disbursements on a construction loan are designed to reimburse the borrower as the construction of the home progresses. Land/Home Financial will disburse construction proceeds based on the work that has been completed on the project.  Disbursements for on-site or direct cost expenses must be verified by an inspection.

Q.  How Will I Know If A Draw Request Has Been Approved?

A.  When we receive a Draw Request, we immediately order an inspection to verify the status of construction project.  The inspection is normally performed within 3 – 5 business days from the time we receive the Draw Request.  When the inspector verifies the work and we receive verification from the title company that your property is free of mechanic’s liens, the Draw Request will be funded.

Q.  Who Does The Inspections?

A.  Inspections are completed by a qualified professional third party, contracted on behalf of Land/Home Financial.

Q.  What Is The Lender’s Contingency Account?

A.  A Contingency Account is money set aside for unforeseen circumstances or cost overruns that may occur during the construction or improvement of a home.  Disbursement of these funds is on an “as needed” basis and will generally be in proportion to the completion of the home.  Of course, as with other costs, a Draw Request is required for disbursement of these funds.  In addition, evidence of the overrun in the form of receipts, paid invoices or canceled checks will also be required.  Once construction is complete, any money remaining in the Contingency Account can be disbursed to the borrower upon request or used to reduce the principal balance on the loan.

Q.  What Is The Interest Reserve?

A.  Interest accrues as funds are disbursed on the loan and monthly payments are required to satisfy this accrual.  The interest payments for the loan are debited from the interest reserve line item.  There are generally enough funds in an Interest Reserve Account to cover all of the interest payments that may be due during the construction term.  If there is no money left in the Interest Reserve Account, you will need to make the interest payments.  Interest payments are due on the 1st of the month.  If the interest payment is not received by the 15th of the month, a late charge is assessed.  Additionally, disbursements will cease until interest payments are current.  Once construction is complete, any money remaining in the Interest Reserve Account will be disbursed to the borrower upon request or used to reduce the principal balance on the loan.

Q.  What If I Need An Extension Of My Construction Loan Term?

A.  Loans that go beyond the required completion date are technically in default pursuant to your Construction Loan Agreement.  If the loan has gone beyond this required completion date, all loan draws are on hold until an extension is granted.  You need to contact your Loan Officer 30 days prior to your required completion date if the construction is not at least 95% complete.

Q.  Is There A Fee If I Need An Extension?

A.  YES, there is a fee associated with an extension of your required completion date. The fee is dependent on the individual circumstances of the borrower and the project in process.  Underwriting and Re-approval of the loan terms may be required.  Your Loan Officer can answer specific questions.

Q.  What Is Required To Roll The Construction Loan To A Permanent Loan?

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