II.A.8.j. Construction to Permanent (09/14/15)

Owned by Kacey Olson
Nov 21, 2018
4 min read

© HUD Single Family Housing Policy Handbook 4000.1

Included in this section are:

i. Definition
ii. Borrower Eligibility
iii. Property Eligibility
iv. Calculating Maximum Mortgage Amount
v. Minimum Required Investment
vi. Mortgage Interest Rate
vii. Required Documentation for Closing
viii. Escrow Account
ix. Required Documentation for Endorsement
x. Endorsement
xi. Start of Amortization

i. Definition

A Construction to Permanent Mortgage combines the features of a construction loan (a short-term interim loan for financing the cost of construction) and the traditional long-term permanent residential Mortgage with a single mortgage closing prior to the start of construction.

ii. Borrower Eligibility

The Borrower must have contracted with a builder to construct the improvements. 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 be purchasing the land at the closing of the construction loan, or have owned the land for six months or less at the date of case number assignment.

iv. Calculating Maximum Mortgage Amount

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 to build;
  • Borrower-paid extras over and above the contract specifications and/or out-of- pocket expenses not included in the builder’s price to build;
  • cost of the land if already owned, or with an acceptable gift documentation, the appraised value of the land may be used instead of the cost; and
  • closing costs associated with any interim financing of the land.

If the land is being purchased from the builder, the cost must be included in the builder’s price to build.

If the Property being constructed is Manufactured Housing, the builder’s price to build must include the sum of the cost of the unit(s) and all on-site installation costs.

v. Minimum Required Investment

(A) StandardThe Borrower may utilize any cash investment in the Acquisition Cost of the Property to satisfy the Minimum Required Investment (MRI).

(B) Required DocumentationThe Mortgagee must document the cash investment was from an acceptable source of funds in accordance with TOTAL or manual underwriting requirements as applicable.The Mortgagee must document the cost and date of purchase of the land, if already owned, by obtaining the Closing Disclosure or similar legal document.The Mortgagee must document any Borrower-paid extras over and above the contract specifications and any out-of- pocket expenses not included in the builder’s price to build by obtaining evidence funds were derived from an acceptable source. The Mortgagee must obtain an itemization of the extras and expenses and the cost of each item.

vi. 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.

The Mortgagee must qualify the Borrower for the Mortgage at the maximum rate at which the permanent Mortgage may be set.

vii. 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 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.

viii. 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.

ix. Required Documentation for Endorsement

If the LTV exceeds 90 percent, the Mortgagee must comply with Inspections or Warranties for Maximum Financing and Required Documentation for Maximum Financing.

If the LTV is 90 percent or less, the Mortgagee must comply with the documentation requirements found in the New Construction Financing LTV Limit.

The following documentation is required for Mortgage endorsement:

  • 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.

x. Endorsement

The Mortgage must be endorsed within 60 Days of the final inspection or issuance of the Certificate of Occupancy (CO), whichever is later.

xi. 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.