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j. Construction to Permanent (09/20/2021)
i. Definition
Construction to Permanent (CP) refers to the construction of a dwelling on land owned or being purchased by the Borrower. The CP program combines the features of a construction loan with that of a traditional long-term permanent residential Mortgage using a single mortgage closing prior to the start of construction.
A construction loan refers to a short-term interim loan for financing the cost of construction.
ii. General Eligibility
The Borrower must have contracted with a builder to construct the dwelling. The builder must be a licensed general contractor.
The Borrower may act as the general contractor, only if the Borrower is also a licensed general contractor.
iii. Property Eligibility
The Borrower must either be purchasing the land at the closing of the construction loan, or already own the land.
iv. Calculating Maximum Mortgage Amount
The Mortgagee must use the lesser of the appraised value or the documented Acquisition Cost to determine the Adjusted Value.
The maximum mortgage amount is calculated using the appropriate purchase Loan-to- Value (LTV) percentage of the lesser of the appraised value or the documented Acquisition Cost.
The documented Acquisition Cost of the Property includes:
• the builder’s price (includes cost of land if being purchased from builder), or the sum of all subcontractor bids and materials (if land is already owned by the Borrower);
• Borrower-paid options and construction costs not included in the builder’s price to build;
• closing costs associated with any interim financing of the land, and
• either of the following:
o for land that is not yet purchased or has been owned six months or less at case
number assignment, the lesser of the cost of the land or appraised value of the land; or
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o for land that has been owned for more than six months at case number
assignment or was received as an acceptable Gift, the appraised value of the land.
For Manufactured Housing, the builder’s price to build includes the sum of the cost of the unit(s), the cost to transport the unit from the dealer’s lot to the installation site, and all on-site installation costs.
v. Minimum Required Investment
(A) Standard
The Borrower may utilize any cash investment in the Acquisition Cost of the Property or land equity to satisfy the Minimum Required Investment (MRI) in accordance with Calculating Maximum Mortgage Amount.
(B) Required Documentation
The Mortgagee must document the cash investment was from an acceptable source of funds in accordance with TOTAL or manual underwriting requirements as applicable.
vi. Required Documentation
The Mortgagee must obtain the Closing Disclosure or similar legal document showing the cost of the land and the date of purchase.
The Mortgagee must obtain evidence that the funds used to pay Borrower-paid options were derived from an acceptable source. The Mortgagee must obtain an itemization of the options and expenses, and cost of each item.
If the land was given as a Gift to the Borrower, the Mortgagee must verify that the donor was not a prohibited source.
The Mortgagee must comply with New Construction requirements.
vii. Mortgage Interest Rate
During the construction period, the interest rate may be variable. The Mortgagee and the Borrower must enter into an agreement that:
• documents the range in which the interest rate may float during construction;
• documents the point of interest rate lock-in;
• specifies that the permanent Mortgage will not exceed a specific maximum interest rate; and
• permits the Borrower to lock in at a lower rate, if available and they have not already locked in a rate.
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The Mortgagee must qualify the Borrower for the Mortgage at the maximum rate at which the permanent Mortgage may be set.
viii. Required Documentation for Closing
In addition to standard FHA documents, the following documents must be used:
(A) A Construction Rider to the Note, and Construction Loan Agreement.
These construction documents may be in any form acceptable to the Mortgagee, but they must provide that all special construction terms end when the construction loan converts to a permanent Mortgage. After conversion, only the permanent mortgage terms (based on standard documents) continue to be effective, making the permanent Mortgage eligible for FHA mortgage insurance.
(B) A disclosure issued to the Borrower explaining that the Mortgage is not eligible
for FHA mortgage insurance until after a final inspection, or the issuance of a Certificate of Occupancy (CO) by the local governmental jurisdiction, whichever is later.
(C) Either a fully executed contract agreement between the builder and the Borrower,
which includes the contractor’s price to build; or documentation of the actual costs of construction where the Borrower is acting as the general contractor.
(D) Documentation of land acquisition or land ownership.
(E) A payoff statement and evidence of the actual payoff if mortgage proceeds are
used to purchase or pay off debt on the land.
ix. Escrow Account
At closing, after funds are disbursed to cover the purchase of the land, the balance of the mortgage proceeds must be placed in an escrow account to be disbursed as construction progresses.
The Mortgagee must obtain the Borrower’s written authorization for each draw prior to disbursing funds to the contractor.
After completion of construction, the construction escrow account must be fully extinguished, and any remaining funds must be applied to the outstanding principal balance of the permanent Mortgage.
x. Required Documentation for Endorsement
The Mortgagee must comply with Required Documentation for New Construction Financing.
The following documentation is required for Mortgage endorsement:
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• The Mortgagee must obtain a title update after conversion to the permanent Mortgage to show that the mortgaged Property is free and clear of all liens other than the Mortgage. • The Mortgagee must verify and document that the construction was fully drawn down and that any remaining funds were used to pay down the principal balance on the permanent Mortgage.
xi. Endorsement
The Mortgage must be endorsed within 60 Days of the final inspection or issuance of the Certificate of Occupancy (CO), whichever is later.
xii. Start of Amortization
Amortization of the permanent Mortgage must begin no later than the first of the month following 60 Days from the date of the final inspection or issuance of the CO.
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8. Programs and Products - Building on Own Land (06/17/2019)