Construction loans can be complicated topics. Understanding the process and the paperwork involved, it's easy for some people to get overwhelmed. That's why we're here: to make sure you don't. Let us explain the ins and outs of construction loans!

1. FINANCING THE BUILD
IS NEW CONSTRUCTION AN OPTION FOR MY CLIENT?

2. LEARNING OBJECTIVES
• Common Myths and Misunderstandings
• Construction Financing Options
• Land Ownership
• Appraisal Process
• Permanent Loan Financing Options
• Realtor Role and Responsibilities

3. COMMON MYTHS OR MISUNDERSTANDINGS

4. COMMON MYTHS OR MISUNDERSTANDINGS
• This is only for the wealthy.

5. COMMON MYTHS OR MISUNDERSTANDINGS
• This is only for the wealthy.
• You have to have a minimum down-payment of 20%.

6. COMMON MYTHS OR MISUNDERSTANDINGS
• This is only for the wealthy.
• You have to have a minimum down-payment of 20%.
• You must already own your land.

7. COMMON MYTHS OR MISUNDERSTANDINGS
• This is only for the wealthy.
• You have to have a minimum down-payment of 20%.
• You must already own your land.
• Building new is more expensive than buying existing.

8. COMMON MYTHS OR MISUNDERSTANDINGS
• This is only for the wealthy.
• You have to have a minimum down-payment of 20%.
• You must already own your land.
• Building new is more expensive than buying existing.
• Permanent loan options are limited.

9. COMMON MYTHS OR MISUNDERSTANDINGS
• This is only for the wealthy.
• You have to have a minimum down-payment of 20%.
• You must already own your land.
• Building new is more expensive than buying existing.
• Permanent loan options are limited.
• I have to own a home already to do extensive renovations or additions.

10. COMMON MYTHS OR MISUNDERSTANDINGS
• This is only for the wealthy.
• You have to have a minimum down-payment of 20%.
• You must already own your land.
• Building new is more expensive than buying existing.
• Permanent loan options are limited.
• I have to own a home already to do extensive renovations or additions.
• A two-time close construction loan has two full sets of closing costs.

11. FINANCING THE BUILD

12. FINANCING THE BUILD
• Builder Financed
• This is typically done in subdivisions so the builder/developer can maintain control of
the overall project.

13. FINANCING THE BUILD
• Builder Financed
• This is typically done in subdivisions so the builder/developer can maintain control of
the overall project.
• Buyer Financed
• This is typically done on “scattered lots” so the builder can avoid ending up with “spec”
homes that are difficult to sell.
• It is almost universally required on custom builds.

14. FINANCING THE BUILD
• Builder Financed
• Buyer Financed
• In both cases the borrower will be paying for the cost of financing the construction, either
transparently in the price of the home or visibly in the cost of the construction perm loan.
Side note
In either case, a final Certificate of Occupancy is required to close. Temporaries are not
allowed.

15. DEFINING TERMS

16. DEFINING TERMS
• Production Homes
• A few models used over and over again in a particular area with limited options for the
homeowner

17. DEFINING TERMS
• Production Homes
• A few models used over and over again in a particular area with limited options for the
homeowner
• Custom Homes
• A unique home, built to the customers exact specifications with nearly unlimited
options

18. DEFINING TERMS
• Production Homes
• A few models used over and over again in a particular area with limited options for the
homeowner
• Custom Homes
• A unique home, built to the customers exact specifications with nearly unlimited
options
• Semi-Custom Homes
• A hybrid of the previous two terms
• Generally several models to choose from with a greater variety of customization
options than with Production Homes

19. BUILDER FINANCED CONSTRUCTION
(LAND)

20. BUILDER FINANCED CONSTRUCTION
(LAND)
• Can I go this route if I already own my own land?

21. BUILDER FINANCED CONSTRUCTION
(LAND)
• Can I go this route if I already own my own land?
• Yes, however, this is not typical.
• The builder may take title, or he may simply add himself to title along with you.

22. BUILDER FINANCED CONSTRUCTION
(LAND)
• Can I go this route if I already own my own land?
• Yes, however, this is not typical.
• The builder may take title, or he may simply add himself to title along with you.
• If you do not own the land, then a purchase contract will be written which
includes the land and the to-be-built home.

23. BUILDER FINANCED CONSTRUCTION
(APPRAISAL)

24. BUILDER FINANCED CONSTRUCTION
(APPRAISAL)
• A “subject to” appraisal will be performed at the time of the initial underwriting.

25. BUILDER FINANCED CONSTRUCTION
(APPRAISAL)
• A “subject to” appraisal will be performed at the time of the initial underwriting.
• Appraisals are good for 120 days (180 days for VA).
• If the house is not completed within that time, either a “Recertification of Value” or a
new appraisal will be completed by the appraiser before the purchase can be
completed.

26. BUILDER FINANCED CONSTRUCTION
(APPRAISAL)
• A “subject to” appraisal will be performed at the time of the initial underwriting.
• Appraisals are good for 120 days (180 days for VA).
• If the house is not completed within that time, either a “Recertification of Value” or a
new appraisal will be completed by the appraiser before the purchase can be
completed.
• When the house is complete, the appraiser will provide a “Final Inspection” report.

27. BUILDER FINANCED CONSTRUCTION
(APPRAISAL)
• A “subject to” appraisal will be performed at the time of the initial underwriting.
• Appraisals are good for 120 days (180 days for VA).
• If the house is not completed within that time, either a “Recertification of Value” or a
new appraisal will be completed by the appraiser.
• When the house is complete, the appraiser will provide a “Final Inspection” report.
The LTV is generally calculated by using the lesser of the purchase price or the
appraisal.

28. BUILDER FINANCED CONSTRUCTION
(PERMANENT LOAN OPTIONS)

29. BUILDER FINANCED CONSTRUCTION
(PERMANENT LOAN OPTIONS)
• The house is purchased from the builder after completion (or refinanced if the
borrower retained ownership during the build – less common).
• Any standard purchase programs are allowed.

30. BUYER FINANCED CONSTRUCTION

31. BUYER FINANCED CONSTRUCTION
• The borrower makes monthly interest-only payments during the construction phase based
on the amount drawn.

32. BUYER FINANCED CONSTRUCTION
• The borrower makes monthly interest-only payments during the construction phase based
on the amount drawn.
• The borrower is the owner of record throughout the entire process.

33. BUYER FINANCED CONSTRUCTION
• The borrower makes monthly interest-only payments during the construction phase based
on the amount drawn.
• The borrower is the owner of record throughout the entire process.
• Loan qualification is based upon the permanent loan terms.

34. BUYER FINANCED CONSTRUCTION
• The borrower makes monthly interest-only payments during the construction phase based
on the amount drawn.
• The borrower is the owner of record throughout the entire process.
• Loan qualification is based upon the permanent loan terms.
• Most lenders will only finance owner occupied and secondary residences. Investment
properties are considered commercial transactions.

35. BUYER FINANCED CONSTRUCTION
• The borrower makes monthly interest-only payments during the construction phase based
on the amount drawn.
• The borrower is the owner of record throughout the entire process.
• Loan qualification is based upon the permanent loan terms.
• Most lenders will only finance owner occupied and secondary residences. Investment
properties are considered commercial transactions.
• “The conversion of construction-to-permanent financing involves the granting of a long-
term mortgage to a borrower for the purpose of replacing interim construction financing
that the borrower has obtained to fund the construction of a new residence.” (Fannie)

36. BUYER FINANCED CONSTRUCTION
• Single-Closing Transactions (Fannie or Portfolio ARM’s)
• Stricter underwriting guidelines
• LTV is generally calculated using the lesser of appraised value and acquisition cost
• Two-Closing Transactions
• More flexible underwriting guidelines
• LTV is generally calculated using appraised value and equity is considered towards down-
payment
The main difference between the two transactions is the type of documents that are signed at
conversion.

37. BUYER FINANCED CONSTRUCTION
(LAND)

38. BUYER FINANCED CONSTRUCTION
(LAND)
• Do I have to own my land already?

39. BUYER FINANCED CONSTRUCTION
(LAND)
• Do I have to own my land already? No

40. BUYER FINANCED CONSTRUCTION
(LAND)
• Do I have to own my land already? No
• If you own the land free and clear, it will become a part of the project, and the equity
will act as all or part of your down-payment.

41. BUYER FINANCED CONSTRUCTION
(LAND)
• Do I have to own my land already? No
• If you own the land free and clear, it will become a part of the project, and the equity
will act as all or part of your down-payment.
• If you own the land but have a lien, the lien will be paid off as the first draw at the
time of the construction loan closing, and any remaining equity will act as all or part of
your down-payment.

42. BUYER FINANCED CONSTRUCTION
(LAND)
• Do I have to own my land already? No
• If you own the land free and clear, it will become a part of the project, and the equity
will act as all or part of your down-payment.
• If you own the land but have a lien, the lien will be paid off as the first draw at the
time of the construction loan closing, and any remaining equity will act as all or part of
your down-payment.
• If you do not own the land, the land will be purchased with the first draw at the time
of the construction loan closing.

43. BUYER FINANCED CONSTRUCTION
(LAND)
• Do I have to own my land already? No
• If you own the land free and clear, it will become a part of the project, and the equity
will act as all or part of your down-payment.
• If you own the land but have a lien, the lien will be paid off as the first draw at the
time of the construction loan closing, and any remaining equity will act as all or part of
your down-payment.
• If you do not own the land, the land will be purchased with the first draw at the time
of the construction loan closing.
• The basic idea is that the construction loan has to be in first and only position.

44. BUYER FINANCED CONSTRUCTION
(APPRAISAL)

45. BUYER FINANCED CONSTRUCTION
(APPRAISAL)
• A “subject to” appraisal will be performed at the time of the initial underwriting.

46. BUYER FINANCED CONSTRUCTION
(APPRAISAL)
• A “subject to” appraisal will be performed at the time of the initial underwriting.
• Appraisals are good for 120 days (180 days for VA).
• If the house is not completed within that time, either a “Recertification of Value” or a
new appraisal will be completed by the appraiser. (VA exception)

47. BUYER FINANCED CONSTRUCTION
(APPRAISAL)
• A “subject to” appraisal will be performed at the time of the initial underwriting.
• Appraisals are good for 120 days (180 days for VA).
• If the house is not completed within that time, either a “Recertification of Value” or a
new appraisal will be completed by the appraiser. (VA exception)
• When the house is complete, the appraiser will provide a “Final Inspection” report.

48. BUYER FINANCED CONSTRUCTION
(APPRAISAL)
• A “subject to” appraisal will be performed at the time of the initial underwriting.
• Appraisals are good for 120 days (180 days for VA).
• If the house is not completed within that time, either a “Recertification of Value” or a
new appraisal will be completed by the appraiser. (VA exception)
• When the house is complete, the appraiser will provide a “Final Inspection” report.
“It costs what it costs to build a house.”

49. BUYER FINANCED CONSTRUCTION
(SINGLE-CLOSING TRANSACTIONS)

50. BUYER FINANCED CONSTRUCTION
(SINGLE-CLOSING TRANSACTIONS)
• The Construction Loan is modified or adjusted to the permanent terms, thus the
“Single-Close” labeling.

51. BUYER FINANCED CONSTRUCTION
(SINGLE-CLOSING TRANSACTIONS)
• The Construction Loan is modified or adjusted to the permanent terms, thus the
“Single-Close” labeling.
• Generally limited to agency products or portfolio ARM’s

52. BUYER FINANCED CONSTRUCTION
(SINGLE-CLOSING TRANSACTIONS)
• The Construction Loan is modified or adjusted to the permanent terms, thus the
“Single-Close” labeling.
• Generally limited to agency products or portfolio ARM’s
• The LTV will be based on the lesser of appraised value or acquisition cost plus
improvements.

53. BUYER FINANCED CONSTRUCTION
(SINGLE-CLOSING TRANSACTIONS)
• The Construction Loan is modified or adjusted to the permanent terms, thus the
“Single-Close” labeling.
• Generally limited to agency products or portfolio ARM’s
• The LTV will be based on the lesser of appraised value or acquisition cost plus
improvements.
• Because the loan documents specify the terms of the permanent financing, the
construction loan will automatically convert to a permanent long-term mortgage
upon completion of the construction.

54. BUYER FINANCED CONSTRUCTION
(SINGLE-CLOSING TRANSACTIONS)
• REQUALIFICATION (Fannie Mae) -- If the loan closes and draws over 70% LTV, the
loan will have to requalify at the end of construction per FNMA. Credit will be re-
pulled and all new bank statements, paystubs, etc. will be needed as well as a new
VOE (Verification of Employment). Once this process is completed and approved
the loan will be modified into the permanent loan.

55. BUYER FINANCED CONSTRUCTION
(SINGLE-CLOSING TRANSACTIONS)
• REQUALIFICATION (Fannie Mae) -- If the loan closes and draws over 70% LTV, the
loan will have to requalify at the end of construction per FNMA. Credit will be re-
pulled and all updated bank statements, etc. will be needed as well as a new VOE.
Once this process is completed and approved the loan will be modified into the
permanent loan.
Eligible Loan Purposes for Single-Closing Transactions
• Purchase transaction (Borrower does not own the lot prior to loan application)
• Limited cash-out refinance transaction (Borrower owns the lot prior to loan
application)

56. BUYER FINANCED CONSTRUCTION
(SINGLE-CLOSING TRANSACTIONS)
• REQUALIFICATION (Fannie Mae) -- If the loan closes and draws over 70% LTV, the
loan will have to requalify at the end of construction per FNMA. Credit will be re-
pulled and all updated bank statements, etc. will be needed as well as a new VOE.
Once this process is completed and approved the loan will be modified into the
permanent loan.
Eligible Loan Purposes for Single-Closing Transactions
• Purchase transaction (Borrower does not own the lot prior to loan application)
• Limited cash-out refinance transaction (Borrower owns the lot prior to loan application)
The LTV is calculated as follows:
• Purchase transaction – using the lesser of the “subject to” appraised value or acquisition
cost
• Limited cash-out refinance transaction – using the “subject to” appraised value

57. BUYER FINANCED CONSTRUCTION
(TWO-CLOSING TRANSACTIONS)

58. BUYER FINANCED CONSTRUCTION
(TWO-CLOSING TRANSACTIONS)
• Most people building a house will have change orders during the process, so this
is the most common and most flexible structure.

59. BUYER FINANCED CONSTRUCTION
(TWO-CLOSING TRANSACTIONS)
• Most people building a house will have change orders during the process, so this
is the most common and most flexible structure.
• Two-closing construction-to-permanent mortgage transactions utilize two
separate loan closings with two separate sets of legal documents.

60. BUYER FINANCED CONSTRUCTION
(TWO-CLOSING TRANSACTIONS)
• Most people building a house will have change orders during the process, so this
is the most common and most flexible structure.
• Two-closing construction-to-permanent mortgage transactions utilize two
separate loan closings with two separate sets of legal documents.
• Virtually all standard loan products are eligible to include VA and FHA.

61. BUYER FINANCED CONSTRUCTION
(TWO-CLOSING TRANSACTIONS)
• A modification may not be used to update the original note; rather a new note
must be completed and signed by the borrowers.

62. BUYER FINANCED CONSTRUCTION
(TWO-CLOSING TRANSACTIONS)
• A modification may not be used to update the original note; rather a new note
must be completed and signed by the borrowers.
• Even though this is two notes, it is still considered one transaction.

63. BUYER FINANCED CONSTRUCTION
(TWO-CLOSING TRANSACTIONS)
• A modification may not be used to update the original note; rather a new note
must be completed and signed by the borrowers.
• Even though this is two notes, it is still considered one transaction.
• State and county tax stamps are only collected on the higher loan amount.

64. BUYER FINANCED CONSTRUCTION
(TWO-CLOSING TRANSACTIONS)
• A modification may not be used to update the original note; rather a new note
must be completed and signed by the borrowers.
• Even though this is two notes, it is still considered one transaction.
• State and county tax stamps are only collected on the higher loan amount.
• Generally lender fees are only collected on one of the transactions.

65. BUYER FINANCED CONSTRUCTION
(TWO-CLOSING TRANSACTIONS)
• A modification may not be used to update the original note; rather a new note
must be completed and signed by the borrowers.
• Even though this is two notes, it is still considered one transaction.
• State and county tax stamps are only collected on the higher loan amount.
• Generally lender fees are only collected on one of the transactions.
• There are even ways to only pay one title insurance premium.

66. BUYER FINANCED CONSTRUCTION
(TWO-CLOSING TRANSACTIONS)
Eligible Loan Purposes for Two-Closing Transactions
• Limited cash-out refinance transaction
• Cash-out refinance transaction (if land was owned at least six months prior to
closing construction loan)

67. BUYER FINANCED CONSTRUCTION
(TWO-CLOSING TRANSACTIONS)
Eligible Loan Purposes for Two-Closing Transactions
• Limited cash-out refinance transaction
• Cash-out refinance transaction (if land was owned at least six months prior to
closing construction loan)
• The LTV is calculated based on the “subject to” value of the project.

68. BUYER FINANCED CONSTRUCTION
(TWO-CLOSING TRANSACTIONS)
FHA Special Considerations
• The LTV is calculated using the lesser of the “subject to” appraised value or
acquisition cost.
• The standard FHA purchase LTV limit of 96.5% is generally followed.
• On a positive note, the closing costs are considered part of the acquisition
cost and can be rolled into the loan if the appraisal allows.

69. BUYER FINANCED CONSTRUCTION
(TWO-CLOSING TRANSACTIONS)
VA Special Considerations
• The loan is qualified as a standard VA Cash-out refinance transaction.
• Many investors limit these transactions to 90% LTV.
• VA does not allow a “subject to” appraisal to be ordered on a refinance
transaction until the house is roughly 95% complete.
• This means that there will always be a second appraisal, and the VA appraiser will
inevitably be a different individual than the person who completed the original
appraisal.

70. THE ROLE OF THE AGENT
(THINGS YOU SHOULD KNOW)

71. THE ROLE OF THE AGENT
(THINGS YOU SHOULD KNOW)
• Get to know the builders in your market even before you have clients.

72. THE ROLE OF THE AGENT
(THINGS YOU SHOULD KNOW)
• Get to know the builders in your market even before you have clients.
• Learn their products and their specialties.
• Parade of Homes is a great vehicle for that.

73. THE ROLE OF THE AGENT
(THINGS YOU SHOULD KNOW)
• Get to know the builders in your market even before you have clients.
• Learn their products and their specialties.
• Parade of Homes is a great vehicle for that.
• Get to know what lots are available for sale.

74. THE ROLE OF THE AGENT
(THINGS YOU SHOULD KNOW)
• Get to know the builders in your market even before you have clients.
• Learn their products and their specialties.
• Parade of Homes is a great vehicle for that.
• Get to know what lots are available for sale.
• Learn what to look for in a lot; being with the builder and client when they walk
lots is a great way to learn the important factors.

75. THE ROLE OF THE AGENT
(THINGS YOU SHOULD KNOW)
• Get to know the builders in your market even before you have clients.
• Learn their products and their specialties.
• Parade of Homes is a great vehicle for that.
• Get to know what lots are available for sale.
• Learn what to look for in a lot; being with the builder and client when they walk
lots is a great way to learn the important factors.
• When you have prospective clients that would consider new construction, discuss
the process with the builder/sales representative prior to taking the client to meet
them.

76. BUYER FINANCED CONSTRUCTION
(TWO-CLOSING TRANSACTIONS)
• Don’t send the client by themselves initially, but if that is unavoidable, contact the
sales representative ahead of time so that they know there is an agent involved.

77. BUYER FINANCED CONSTRUCTION
(TWO-CLOSING TRANSACTIONS)
• Don’t send the client by themselves initially, but if that is unavoidable, contact the
sales representative ahead of time so that they know there is an agent involved.
• Most construction lenders require the builders to be approved; generally a
builder will have a list of lenders with whom they are approved.

78. BUYER FINANCED CONSTRUCTION
(TWO-CLOSING TRANSACTIONS)
• Don’t send the client by themselves initially, but if that is unavoidable, contact the
sales representative ahead of time so that they know there is an agent involved.
• Most construction lenders require the builders to be approved; generally a
builder will have a list of lenders with whom they are approved.
• Discuss with the builder ahead of time how commissions will be paid.

79. BUYER FINANCED CONSTRUCTION
(TWO-CLOSING TRANSACTIONS)
• Don’t send the client by themselves initially, but if that is unavoidable, contact the
sales representative ahead of time so that they know there is an agent involved.
• Most construction lenders require the builders to be approved; generally a
builder will have a list of lenders with whom they are approved.
• Discuss with the builder ahead of time how commissions will be paid.
• Most builders will have their own construction agreements, so standard purchase
contracts are normally not necessary.

80. BUYER FINANCED CONSTRUCTION
(TWO-CLOSING TRANSACTIONS)
• Don’t send the client by themselves initially, but if that is unavoidable, contact the
sales representative ahead of time so that they know there is an agent involved.
• Most construction lenders require the builders to be approved; generally a
builder will have a list of lenders with whom they are approved.
• Discuss with the builder ahead of time how commissions will be paid.
• Most builders will have their own construction agreements, so standard purchase
contracts are normally not necessary.
Communication is the key to a successful transaction!

81. Scott Hine
Branch Manager/Loan Officer
540-429-2474
shine@lendtheway.com