The strain of the current inventory challenge, however, has presented a new opportunity for financial service providers across the board: renewed participation in the secondary mortgage market, new innovations, involvement of government housing agencies, and program enhancements. The result has led to a resurgence of the consumer construction-to-perm loan product.
“Government agencies such as the USDA and Ginnie Mae are responding to consumer demands for better programs and lender demands for more efficient loan origination and loan sale executions.”
Shannon Faries, Land Gorilla
“Government agencies such as the USDA and Ginnie Mae are responding to consumer demands for better programs and lender demands for more efficient loan origination and loan sale executions,” said Mr. Faires.
Welcome to the future of single close construction-to-permanent lending (CTP).
“Rebirth is a fantastic way to describe this one-time close product,” said Christina Jenkins, attorney and director of customer support at AsurityDocs, who shared the panel with Mr. Faries.
Traditionally, when a custom or semi-custom home is built, financing of the project requires a two-time close transaction. The first requires an interim construction loan to finance the build. The second takes place upon completion when a permanent residential home loan is secured to pay off the interim loan.
A CTP loan provides a single close solution offering a quicker, more convenient and cheaper financing option by combining the construction and permanent loans into two phases and one closing.
With only one closing, the borrower saves on costs for a second settlement agent, recording fee, and title insurance. The borrower also doesn’t need a lender to “take-out” the construction loan. The loan converts to a permanent residential mortgage loan assuming (1) the borrower income and assets have not significantly changed and (2) the as-built home has the same or greater value as projected.
How A CTP Loan Works
The benefits of this loan are well worth demonstrating to borrowers that want to finance a custom-built home as an alternative to the two-loan process.
Phase One: Construction Financing Phase
This typically takes twelve months or less for an average non-Jumbo build.
- Interest only
- Interest rate differences and accrual
- Staged disbursements
Phase Two: Permanent Financing Phase
After construction completion, the construction-to-permanent loan transitions to the Permanent Phase.
If construction is not completed on time or the borrower and lender change the terms of the permanent phase, a modification agreement puts those changes into effect. (But, note, this is not a closing).
- Principal and interest
- Modification into final terms
One-Time Closing Document Considerations:
- State laws impacting one-time close construction operations and lien perfection
- Federal disclosure requirements of past vs. present
- Loan documents that accurately reflect the transaction
One-Time Close File Documentation/Common Errors:
- Builder/Contractor Entity Signatories and Documentation
- Unsigned bid/Changed bid without updated contract
“There isn’t a one-size fits all solution.”
Christina Jenkins, AsurityDocs
Finding The Right CTP Lending Partner
The one-time close product is unique in that “there isn’t a one-size fits all solution,” says Ms. Jenkins. While certain states have fewer (though, still many) requirements like in West Virginia, others, like Texas, are exceptionally detailed.
AsurityDocs gathered top feedback from lenders around the country to understand key areas of concern for providing a CTP loan package.
- Individual state law requirements
- Understanding federal disclosures past vs. present
- Ensuring loan documents accurately reflect loan transaction
“The good news,” says Ms. Jenkins, “is that the issues arising from either of these areas can be resolved before you ever take an application.”
The key to maximizing the benefits of CTP lending is to build a strong team of business and legal partners to help navigate the evolving construction lending landscape, that will help navigate you around any potential legal and financial implications.