Home Construction & Renovation – August

These words (except for quotes) are my views & opinions and do not represent those of my employer.


Product of Construction-to-permanent financing.
New construction, as completed, with a Construction to Permanent mortgage!

A Realtors’ Quick Guide to a Construction to Permanent Mortgage (3 min read)

When you combine a permanent fixed rate mortgage with a short term home construction loan you get a hybrid loan package that may fit your client’s needs perfectly. A Construction-Permanent Mortgage can finance both a home purchase and any construction or renovation costs, including a total knock-down. For homes already owned, equity created by the renovation can be applied to the total equity needed to finance the loan, effectively creating a no-down payment option. During the construction phase interest-only payments are made on the funds advanced to pay for the construction. A loan Disbursement Schedule is set up prior to closing so the borrower and builder will know how the payments will be made during construction. When the construction is done the interest-only loan converts to an amortizing 30 year fixed rate mortgage.

The rate on a Construction to Permanent mortgage can be locked at application for 60 days or longer if needed. The rate stays the same when the loan converts to a permanent mortgage.

To apply, your client will need a 1) signed construction contract & cost breakdown with the contractor, 2) a signed property purchase contract and 3) a set of building specs & plans. Permits are not needed to apply but will be required before construction may begin.

Because of the lengthy time frame involved with construction, up to a year in some cases, there are special considerations when it comes to construction financing. Each Construction to Permanent mortgage is structured to meet the borrower’s specific needs. Being prepared to make the transition financially and physically while a home is being built or undergoing major renovation can require some juggling and careful planning.

If the borrower waits to sell their current home until the new home is ready to move in, they must qualify for the new construction loan while still making payments on their existing home even if it’s listed for sale but has not closed. If the borrower cannot qualify this way, they may need to consider selling their current home before construction begins and temporarily rent or live with family until the new home is ready.

On a construction purchase transaction the borrower must put down at least 20% of the total Acquisition Cost, i.e. the combination of the property contract and construction contract. The construction-to permanent mortgage can cover up to 80% of this amount. Construction costs are generally categorized as “hard costs” and “soft costs.” Construction materials and labor are hard costs and things like design plans, architectural drawings, engineering fees, permits, etc. are soft costs. Some soft costs can be financed if they are included into the construction cost breakdown.

The borrower may need the proceeds from the sale of their current home to help with their down payment on the new home. If that’s the case they’ll need to sell before they close on their construction to permanent mortgage. In addition to the down payment the borrower may need money for closing costs. The borrower must also have additional funds on hand to cover any potential cost overruns and may need reserves to cover certain housing expenses during the construction phase. The reserve requirements depend on the transaction. During the pre-qualifying interview the borrower is prepared upfront for what is needed.

Building a new home or doing a major renovation can be a complex process. A one-time close Construction to Permanent mortgage makes the financing simple. Your client can focus their energy and time on their project with peace of mind knowing both the construction financing and the mortgage are approved, the rate is set and the details for financing each stage from start to finish has been worked out ahead of time.


“The secret to staying young is to live honestly, eat slowly, and lie about your age.” – Lucille Ball


Arthur Aranda • NMLS #1042093
Construction & Renovation Loans
New Jersey, New York, Connecticut
201-741-1537 talk/text


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How Does a Construction to Permanent Mortgage Work?


  • A Construction-to-Permanent “one time close” mortgage loan involves only one application and one closing that covers both the construction phase and the permanent mortgage and has one rate set for both.
  • The construction phase of the loan has interest-only payments. The bank will set up a disbursement schedule which are the payments made to your builder as the work gets completed.
  • An initial loan disbursement is made at closing if you are also purchasing the property (land or a knock-down) on which to build.
  • If you have a loan on the property that you’re building on, the first disbursement of the construction loan will pay-off that loan before construction starts.
  • When the construction phase is complete the construction loan converts over to a permanent fixed-rate mortgage.



Contact Arthur
LinkedIn.com/in/arthuranda
201-741-1537 talk/text
Prospect Street Leonia, New Jersey 07605

Home Renovation Finance


The Real Estate And Mortgage Section management takes great pleasure in bringing to you, our readers, this informative article by Arthur Aranda. Mr. Aranda is a highly respected Home Construction & Renovation Mortgage Specialist who possesses a wealth of information about, and extensive knowledge in, residential New Construction mortgage loans, with special emphasis on Construction to Permanent loans. Please join us in welcoming Mr. Aranda by reading his first REAMS post. Thanks! Here is the article:

 

Home Renovation Finance

Homeowners can finance their renovation projects based on the appraised value of their homes, after the renovation is completed. In some cases, personal funds may not be needed for the construction costs. This unique feature of a “one-time-close” Construction to Permanent mortgage leverages the home’s future equity created by a major renovation or gut rehab construction project.

Here’s a brief overview of how it works. Let’s say the current appraised home value is $300,000 with a $200,000 mortgage balance. The homeowner plans a major home renovation with a $200,000 budget. A home equity loan would generally only provide $70,000 which is 90 per cent of the $300,000 appraised value minus the $200,000 mortgage.

If the appraised home value – after renovation – is $500,000, they may be able to qualify for a $400,000 Construction to Permanent mortgage which is 80 per cent of the home’s future appraised value. At loan closing the first draw would pay off their $200,000 mortgage balance, leaving $200,000 available for the construction. When construction work is completed the $400,000 loan converts to a permanent fixed rate mortgage at a rate that was set months earlier at time of application.

There’s a caveat however. The future appraised home value must cover construction costs, plus any existing mortgages; but this doesn’t always happen because a renovated home value may not appraise for the amount needed ($500,000) to cover the new mortgage, so the homeowner would need to use some of his/her personal funds.

Even when the entire construction budget can be financed based on the future appraised value, personal funds would still be needed to cover closing costs and typically, five per cent of the construction budget must be set aside as reserves to cover cost overruns. The lender will provide a Good Faith Estimate of closing costs and calculate reserve requirements so that the borrower will be prepared upfront for how much of their personal funds will be needed.

Each Construction to Permanent mortgage is structured to meet the needs of a homeowner’s specific renovation project. The lender will review a borrower’s income and overall financial condition to determine the qualifying loan amount. Generally a credit score of 680 or better is required; and for larger loan amounts a higher credit score may be needed.

Homeowner interested in this type of financing should talk to a construction lender early on in order to understand the process from application to funding, and to determine what documents will be needed for an expedient loan approval. They should also have some idea of what their home will be worth after the renovation. A good starting point for checking home values is a Zillow home price estimate (Zestimate). Currently, the national accuracy of a Zestimate is about 8 percent of the final sales price of a home.

Homeowners can also talk to real estate professionals, either agents or appraisers, who know the market in more details and can provide advise on how major home improvements will affect value. An independent real estate appraiser hired by the lender will review construction plans to determine the home value after renovation is completed.

A major home renovation project can be a complex process; but a one-time close Construction to Permanent mortgage can help make the financing simple and more affordable. Homeowners can focus on their home renovation with peace of mind; knowing that both the construction financing and the permanent mortgage are approved, the rate is set and the details of financing each stage from start to finish has been worked out ahead of time.

By Arthur Aranda



Contact Arthur
LinkedIn.com/in/arthuranda
201-741-1537 talk/text
Prospect Street Leonia, New Jersey 07605