Construction perm

Inventory? What Inventory? Construction to Perm

Finding solutions to one of today’s biggest market challenges: Part 2

Construction to Perm

Welcome back!

In Part 1 of our Inventory series, we discussed renovation loan programs.  As we concluded we identified similarities with the better known Construction to Permanent products.  Let’s take a few minutes today to explore the differences. Didn’t read Part 1? Catch up here.

There are some significant differences between the two programs that we will explore. But let’s focus on the opportunity that exists for lenders today in marketing construction programs.

Commonly referred to as C-to-P loans, construction loans are perfect for the borrower who is starting from scratch on a new-build property and/or taking on a much larger scale renovation.

The borrower obtains a loan that funds the construction as well as the long term financing. Construction loans are typically used for custom build projects or in communities or subdivisions not controlled by a large scale developer.  Larger developers and production builders frequently contract to sell the home, but the financing by the buyer is not closed until the build is complete. C-to-P loans can vary in structure and the monthly payments required differ significantly from the renovation product.

C-to-P Version #1

  • Two-time close process – short term construction loan (typically 9-12 months) refinanced into a long term, permanent mortgage loan post construction
  • Borrower typically pays interest only payments on the construction loan
  • Principal balance increases over the course of the construction period as disbursements are made to the builder
  • Permanent financing with fully amortizing principal and interest payments begins upon completion of construction

C-to-P Version #2

  • One-time close process – A single loan transaction that funds construction and then is modified/converted into a long term fixed rate loan
  • Borrower typically pays interest only payments during construction period
  • Principal balance increases over the course of the construction period as disbursements are made to the builder
  • Loan is modified to fully amortizing payments after construction completion

In both scenarios, like the renovation product, the lender is responsible for managing the disbursement requests from the builder. Disbursement funds are drawn off the loan, increasing the principal balance owed with each advance until fully disbursed.

Unlike renovation loans, there is no limitation to what percentage of the loan proceeds may be used directly for the construction improvements. Loan to value limits are established by the lender and typically measured against either the as-completed value (if borrower already owns property or has held title to property for greater than one year) or lot/property acquisition cost plus construction costs.

So while similar in concept, there are significant structural differences in the loan products.  As a summary, let’s take a side-by-side look at the variances between the programs:

Renovation Construction to Perm
Loan funding Fully funded at loan closing Funds as construction draws are made
Loan payments Full amortizing payments from time of loan closing Interest only payments on drawn principal until fully disbursed and converted to permanent financing
Construction funds Held in an interest-bearing account during construction Drawn from loan as disbursed; adds to principal balance of loan
Sale to Fannie Mae Loan may be sold to Fannie Mae at origination, but servicing must be retained until post-construction Loan cannot be sold to Fannie Mae or servicing transferred until construction is complete and in permanent financing
Timing of MI activation At time of loan closing 1) At time of loan closing/prior to completion or;
2) After completion of construction
Length of MI commitment 120 days 12 months

Both products present attractive product expansion opportunities for lenders and provide borrowers additional options as we face the inventory challenges of today!  Remember that Genworth Mortage Insurance is pleased to partner with you on either of these product options: Renovation Loans and Construction to Perm.

Contact your local Genworth MI Sales Representative today to discuss the opportunities.

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