A construction-permanent mortgage (CP loan) is a three stage mortgage that allows you to finance the construction of your new home. There are several types of CP Loans. The down payment, draw schedule, payment during construction period varies from lender to lender, interest rates; and conversion terms, could also vary.
Unlike other kinds of new construction mortgage loans, CP mortgage enables you to lock your rate of interest and close the loan prior to development. This can be a one-time closing without having to re-qualify for your permanent period. (You might have a float down choice when construction is finished.)
Throughout Construction, disbursement is designed to include the cost to construct, and interest is paid out only on the outstanding balance. When construction of your home is finished, the borrowed funds will convert to a permanent home loan. At this time, scheduled monthly obligations of principle and interest plus escrow’s will take effect.
Step 1: The Application
During the application stage, you will make use of a Construction-Permanent Home Loan Officer (MLO) to talk about your mortgage choices. The MLO will walk you throughout the process from beginning to end. She or he will collect the needed documentation from you and provide you with disclosures to evaluate and sign.
An appraisal will be done by a certified real-estate appraiser. Following examining your blueprints, specs and property or home, the appraiser will look for current sales of equivalent properties inside your neighborhood to establish value of your residence upon completion.
Draws schedule and/or partial releases of funds are based on the Bank’s Timetable and Contractor Contracts. The payments depends on completed work as the home is constructed, and draws will be based on a schedule as agreed between you, your builder and Lender.
Once a completed the credit approved, the builder/contractor and project review is completed, a underwriter will issue a final approval and the loan will be ready to close.
Step 2: Building and Disbursement
The constructing and disbursement phase coincides with the building of your new house. Loan money is paid depending on the terms of your Building Loan Agreement and draw schedule.
Prior to each disbursement, The Lenders usually require an inspection to determine that the work to date has been completed. Funds will be released for payment (as indicated for that specific draw) only after the inspection.
Borrower funds will be used first, and then Lenders will begin releasing bank loan proceeds.
Each construction disbursement is limited to the amount that corresponds to the percentage of completion according to the disbursement schedule.
Funds are paid for work and materials which have been finished ,installed and/or completed.
No disbursements are permitted if a lien has been filed against the subject property.
Step 3: Conversion
Conversion is the final stage of the process. At this point your loan is converted from the construction phase to the permanent phase. The Buyer/Borrower now will make monthly loan payments based on the agreed upon permanent loan agreement.