Construction to Permanent Finance 101

This unique mortgage product is one loan with one set closing to fund the construction and provide a permanent mortgage. The loan can be used to finance the purchase of the property and the construction costs. If the property is already owned, any equity created when the construction is complete can be used toward the total equity to finance the transaction, effectively creating a No-Down Payment Option. During the typical 12 month 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 both the borrower and builder will know how the construction will be funded. When all the work is complete the construction loan converts to a 30 fixed rate mortgage.

Depending on the borrower’s needs, the rate on a Construction to Permanent mortgage is locked at application or prior to the closing. This will be the same rate when the construction loan converts to a permanent mortgage.

At application, the borrower will need to provide the lender with a signed construction contract, signed property purchase contract, if applicable and a set of building plans. Building permits are not needed to apply but will be required before any actual construction may begin.

Because of the lengthy time frame involved with construction, up to a year or even longer 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. Borrowers who cannot qualify this way, 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 lender will typically finance up to 80% of this amount. Construction costs are generally categorized as   “hard costs” and “soft costs.” The 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 contract.

The borrower may need the proceeds from the sale of their current home to help with the down payment on their new home. If that’s the case they’ll need to sell before they close their construction to permanent mortgage.  In addition to the down payment the borrower will need money for closing costs and reserves. With only one loan needed for both construction and permanent mortgage, closing costs are much less than when two separate loans are used to finance the project.

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 and are calculated by the lender before the loan is approved so the borrower is prepared upfront for what is needed.

Building a new home or renovating an existing one is a complex process. A one-time close Construction to Permanent mortgage makes the financing simple. The borrower 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.

ABOUT: Arthur Aranda has over 25 years of mortgage banking experience and works extensively with home builders and homeowners on financing home construction and renovation projects. Aranda is also a Certified Financial Education Instructor and provides First Time Homebuyer Seminars.  For more information on construction loans or to schedule a FTHB seminar please call Arthur Aranda at 201-741-1537.

Building for Multi-Generational Households

One in six Americans currently lives in a multi-generational family household, with three or more generations living together.  Some 51 million Americans (16.7% of the population) live in a house with at least two adult generations, or a grandparent with at least two generations, under one roof, according to a Pew Research Center analysis of the latest U.S. Census Bureau data. The Pew analysis also reported a 10.5% increase in multi-generation households from 2003 to 2009. New Jersey, with a larger and growing immigrant population, (and higher cost of living) very likely has an even greater percentage of multi-generational households.

This upward trend of multi-generational households will undoubtedly continue in the 21st century. If you are planning to renovate or increase the living space of your home or perhaps contemplating new construction (usually a teardown in NJ) it might be a good idea, to consider a multi-generational home design.  The grandparents may move in to look after the kids when mom and dad are working. Young adult children often return home for an extended stay after college. Aging parents move in with their adult children to be looked after. Grandchildren & family members visit for extended periods.

Houses designed for multi-generational occupancy include private areas for independent living such as small kitchenettes, private bathrooms, and even multiple living areas. Separated living spaces are often connected to the main house for security and economy. Multi-generational homes are classified as single family, and not multifamily.

For economic and social reasons it seems fairly certain there will be more multi-generational households in the years to come.  Newly constructed homes and older home renovations designed specifically for multi-generation occupancy, or with that option to convert later, may even sell for more someday when it comes time to move.

ABOUT: Arthur Aranda has over 25 years of mortgage banking experience and works extensively with home builders and homeowners on financing home construction and renovation projects. Aranda is also a Certified Financial Education Instructor and provides First Time Homebuyer Seminars.  For more information on construction loans or to schedule a FTHB seminar please call Arthur Aranda at 201-741-1537.

Teardown & Rebuild…Easier Than You Think.

A house that may be a good candidate for a teardown is in a desirable location but below the standards of the other homes in the neighborhood. It may be much smaller than average, have serious structural problems, require too many repairs, or have outdated heating, cooling, plumbing or electrical systems.  It tends to be priced below the average for the neighborhood and often remains unsold for longer periods, unless it actively marketing as a prospective teardown.

A Rule of Thumb to help determine if a teardown will support a newly built house is when the value is at two to three times the price of the teardown house at acquisition. For example, if you can buy an older, functionally obsolete house in a good location for $250,000 and a brand new house built on the same lot will support a market value of $500,000 to $750,000, it may be a good teardown candidate.

Once you’ve decided on the neighborhood, contact a real estate agent with experience in teardowns or substantial renovations.  Realtors can often recommend potential builders for your project or you can contact the local chapter of the National Association of Home Builders for advice. Some mortgage lenders may also be able to provide a list of approved builders they have worked with on new home construction.

New homes are energy efficient, from the roof, windows, and doors to the heating and cooling system, an important feature for home owners today.  They are wired for all the in-home entertainment and modern appliances we use today.  The interior layout of a new home is customized for the style of living the home buyer wants for their family. For example, many homes are custom built now for multi-generational living. If these features are important and cannot be attained at a reasonable cost by renovating, then a teardown may be the way to go

Buying a house in order to tear it down requires planning, some extra homework and some added expense. Demolition costs vary with the size and location of the teardown property, but generally range from $10,000 to $25,000. You may be able to recoup most of the demolition expenses by recycling some of the materials in the teardown by selling the contents or by tax-deductible donations.

Your municipality will require you or your builder to obtain a demolition permit before you start doing anything. You will need to contact the utilities companies to determine when and how to disconnect gas, electric, water services.  Check with the fire department to determine what sort of inspections or oversight is required prior to demolition.  Local government may also require inspections for toxic materials inside the house, which is a concern if the structure dates back to the 1960s and earlier, when asbestos was commonly used as a construction material in ceilings & duct work.

Can I finance a teardown?

Absolutely yes! Some banks offer mortgage products for new home construction and have a lot of experience lending on teardown projects. One such mortgage product ideally suited to finance a teardown is a construction to permanent mortgage, sometimes called a “one time close” construction to permanent mortgage.

Each construction to permanent mortgage is structured to meet the specific needs of the borrower. A one time close construction to permanent mortgage makes the financing simple. The borrower can focus on their project with peace of mind knowing both the construction financing and the permanent mortgage are approved, the rate is set and all the details for financing each stage from start to finish have been worked out ahead of time.

ABOUT: Arthur Aranda has over 25 years of mortgage banking experience and works extensively with home builders and homeowners on financing home construction and renovation projects. Aranda is also a Certified Financial Education Instructor and provides First Time Homebuyer Seminars.  For more information on construction loans or to schedule a FTHB seminar please call Arthur Aranda at 201-741-1537.

Financing a Major Home Renovation (3 min read)

A homeowner can finance their renovation project based on the home’s appraised value, after the renovation is complete.  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 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 the 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 the loan closing the first draw pays off the $200,000 mortgage balance and $200,000 is available for the construction. When the work is complete the $400,000 loan converts to a permanent fixed rate mortgage at a rate that was set months earlier at the time of application.

There’s a caveat. The future appraised home value must cover construction costs plus any existing mortgages.  This doesn’t always happen. The renovated home value may not appraise for the $500,000 needed to cover the new mortgage so the homeowner would need to use some of their personal funds. Even when the entire construction budget can be financed based on the future appraised value, personal funds are still 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 the borrower is prepared upfront for how much of their personal funds will be needed.

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

The homeowner should talk to a construction lender early on to understand the process from application to funding and what documents are 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, or 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 advise on how major home improvements will affect value.  An independent real estate appraiser hired by the lender will review the construction plans to determine the home value after the renovation is complete.

A major home renovation project can be a complex process. A one-time close Construction to Permanent mortgage can help make the financing simple and more affordable. The homeowner can focus on their home renovation with the peace of mind knowing 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 ahead of time.

ABOUT: Arthur Aranda has over 25 years of mortgage banking experience and works extensively with home builders and homeowners on financing home construction and renovation projects. Aranda is also a Certified Financial Education Instructor and provides First Time Homebuyer Seminars.  For more information on construction loans or to schedule a FTHB seminar please call Arthur Aranda at 201-741-1537.

 

3 Minutes on 2 Types of Construction Loans

There are two main types of home construction loans:

Construction-to-Permanent. With these loans, the lender advances the money as needed to pay for construction. After the home is built, the same lender converts the construction loan to a permanent mortgage. There is one loan and one closing for both the construction and the permanent mortgage. This is the most popular option.

Stand-alone construction. With these loans, the lender advances the money to build the house. When construction is finished, a permanent mortgage from the same lender or another lender pays off the construction loan. This is two separate loans and there are two closings.

With a construction-to-permanent loan, there is one closing. At application the lender reviews your financials and the construction plans and qualifies you for a maximum loan amount. During construction, you pay only interest on the outstanding loan balance. Loan disbursements to the builder are made as the work gets completed on the project. The construction loan converts into a permanent mortgage after the home is built. You can lock a mortgage rate at application, even before construction begins.

In some cases a stand-alone construction loan may be more popular if it allows for a smaller down payment. Because this type of loan doesn’t allow a mortgage rate lock in advance, there is a risk of interest rates will rise during the construction period. Another disadvantage is that your circumstances could change during construction, making it difficult or impossible to qualify for a permanent mortgage. And because there are two closings the financing costs will be higher for this option.

Stand-alone construction loans are also used for investments projects whereas the builder intends to sell the new home upon completion. The same lender or another lender may provide a standard permanent mortgage to the new owner.

Qualifying for a construction-to-permanent loan can be more challenging than getting a standard mortgage. Your down payment or equity in the completed property must be at least 20 percent of the loan amount. Also, as part of the loan qualification process the lender will determine whether you can afford the loan payments during construction while you’re paying the rent or mortgage on your current home.

There are almost always unexpected cost overruns when building a new home. You will need additional savings to pay for these unexpected costs. The lender will need to verify these savings to make sure you are prepared to continue with the construction to its completion.

Typically, your lender will also review the builder’s credit standing, financial condition and experience. During construction, the lender will also conduct regular inspections as the home is built. During the construction phase, the lender will disburse payments to the builder in stages called “draws” and send an appraiser or inspector to the building site to make sure the construction is proceeding as planned.

Each Construction to Permanent mortgage is structured to meet the borrower’s specific needs. Building a new home or renovating an existing one is a complex process. A one-time close Construction to Permanent mortgage makes the financing simple. The borrower can focus on their construction 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.

ABOUT: Arthur Aranda has over 25 years of mortgage banking experience and works extensively with home builders and homeowners on financing home construction and renovation projects. Aranda is also a Certified Financial Education Instructor and provides First Time Homebuyer Seminars.  For more information on construction loans or to schedule a FTHB seminar please call Arthur Aranda at 201-741-1537.