Construction and Rehabilitation Construction Financing

Transcription

1 Construction and Rehabilitation Construction Financing

2 YOUR INSTRUCTORS Dave Konrad District Manager First Horizon Home Loans Mary Robenalt Porter General Counsel NorthStar Title Services, LLC

3 Course Intro & Objectives Realtor Benefits Rehabilitation Advantages Five steps to Financing Sample Scenarios Rates and Fees Q & A

4 Advantages of REHAB Financing Unique ability to use appraised value with no land seasoning. Create a ZERO-DOWN solution Eliminate cash flow issues for your borrower by including closing costs and construction interest fees into the loan amount. *Zero down solutions are subject to as-completed appraised value

5 Realtor Benefits Realtor Benefits: Increase sales with Construction Loans and Rehab Financing Sell more homes with fewer showings Generate more referrals by decreasing time on market Update listings to add greater appeal Partner with builders/remodelers for additional referrals Commission paid at initial closing Sell more rental homes Get listing on house they are selling

6 Step 1-1 Builder Registration Typical Builder Registration & Checklist Builder Registration Form Contractors License/Registration, if applicable General Liability Certificate for $500,000 Registration will be completed within 48 hours In most cases, First Horizon does not require financial statements from the builder. The Builder/GC must be a licensed registered general contractor Some lenders do not get involved with builder registration

7 Step 2-2 Credit Approval In addition to the Loan Product Guidelines most Construction and Rehab programs have FICO, LTV, and/or Occupancy restrictions over-laid to compensate for additional risk. (ie. must agree to list home) Some lenders treat as a purchase others as a refinance.

8 Step 3-3 Construction Approval Construction Underwriting Dept. will review the construction portion of the file. Full, subject to appraisal (1004) if rehab loan, must have an as-is value. Proof of land ownership or purchase agreement Signed bids or contracts from all contractors or Remodelers Survey or plot plan (if applicable) Builders Risk Insurance (provided by builder or borrower) Plans and specs if applicable Up to 3 contractors per project. For example, roofing, electrical and plumbing The borrower may contract their own subs in this instance. Building permits if not issued generally will be required

9 Step 4-4 Conference Call A pre-closing conference call is conducted to review all of the specifics of the loan and answer any questions. Attendees include: Construction Underwriter Loan Officer Borrower Builder/Contractor

10 Step 4-4 Conference Call Discussion during the call revolves around the following items: Inspection, draw procedures, and schedule Construction interest billing Insurance and modification questions Details of transaction; rate, contract, lot/land, and loan amount Release of funds at closing Estimated construction time Construction lending contacts

11 Step 5-5 Construction Draw schedule determined by scope of work to be completed Builder completes work and requests draw payments from Lender Scope of rehab will determine the number of draws paid to the builder Borrower pays interest only payments based on funds released for purchase and payments made to the builder Borrower responsible for taxes and insurance during construction

12 Owner/Contractor Loans As an exception, some lenders allow owner and/or contractor transactions Typical requirements Borrower is a licensed General Contractor and primary source of income is from home construction Full Documentation Loans only LTV based on costs-not future value 6 months PITI reserves required Add to construction loan rate to compensate for risk

13 REHAB SCENARIO Purchase price: $120,000 Rehab Cost: $ 30,000 TOTAL: $150,000 Interest reserve: $ 1,800 optional Contingency ($ overages) $ 5,000 optional Closing Costs: $ 2,300 optional Modification account: $ 2,500 optional TOTAL of Costs & Fees: $161,600 Appraised Value: $170,000 LTV: 95% Loan amt: $161,600 95% of value = 100% of costs and fees!

14 OTC REHAB Process Overview 1 Submit OTC Loan Buyer Builder Project 2 Close on Construction Loan REALTOR COMMISSION PAID 3 Construction Begins Draws Interest Only payments 4 Nearing Completion Lock Permanent Financing terms 5 Loan Modification

15 PRICING FEES AND RATES

16 Construction & Rehab Fees The following fees are typical for this market AND can be financed into the loan. These fees must be disclosed on the GFE and HUD- Title updates: $50- $75 each After each inspection Inspection Fees: $100 each Modification Fee: $125 Construction or Rehab Fee: 1% 1-5 inspections depending on scope $200 for 1st/2nd combo loans Loan amount with a cap of flat fee Extended Locks Customer may choose to float their interest rate during construction tion or extended locks may be used to protect the interest rate during constructionc Typical Cost to Lock or Float during Construction Float Rate at no cost and Construction Fee is waived by some lenders Lock Rate 1% of loan amount for >180 days (credited at modification) w/ float down Bump rate % with float down within 60 days of modification

17 Title Issues in Construction Projects Title Basics Examining New Construction Issues Acquisition & Development Financing Title Issues Rehab Title Issues

18 Plant and Courthouse Plant Court Sheet - Land Index and Name Index Chain of Title, Liens and Encumbrances Bankruptcy Court and Update for Filing Courthouse Probate and Common Pleas Court Tax & Legal Last deeds of record Update for Filing

19 Builder/Developer Issues A & D Does the property need to be split from a piece of property or consolidated with a piece of property? Is the City going to allow the split or consolidation? A surveyor must go out to the property and create a new legal description and plot the new land on a plat that must be signed by the owners, city and any utility companies if they are putting utilities in.; and Builder must put in the road ways, utilities etc that are necessary

20 Timing for the Builder/Developer Go to city council (most cities meet once a month to go over these type of things- usually the building department of the city will review and then it will be voted on by the city council); Owners must sign off on the Survey/Mylar; Utility companies; and Mortgagees Could take Months

21 When Do You Start the Title Search? Title search started on the big piece of property caption and more land; Find easements, restrictions, mortgages and liens on the property; Easement or Restriction Issues must be taken care of old ones terminated and new ones drafted; Title commitment sent to the surveyor

22 Title Commitment/Schedule A Proposed Insured/ Amount of Insurance Lender - Lender s Policy Owner - Owner s Policy Leasehold - Leasehold Policy Title Vested Fee/Leasehold Current Owner/Lessor Legal Description Proposed Legal

23 Title Commitment Schedule B-B Section I Requirements/Conditions to Close All documents necessary that would then allow the filing of the appropriate deed or mortgage- executed plat/survey Appropriate Deed from Builder/Developer to Buyer when applicable Mortgage Deed from Buyer to Lender when applicable

24 Title Commitment Schedule B - Section II General /Standard Exceptions Does not cover anything between the date and time of the commitment and the recording date - automatically taken out in policy because we update prior to filing Facts, rights, interests etc. not shown by the public record such as unrecorded leases or land contracts and it can be removed by a Seller s affidavit Encroachments, conflicts etc. that can be taken care of with a survey Liens, or rights to liens for services, labor or materials that can be removed with a seller s affidavit Rights of sellers in actual possession can also be removed with a seller s affidavit or marked up

25 Other Exceptions of Title Issues Liens Liens Easements, Restrictions and Right of Ways Leases - Oil and Gas/Mineral Interests Bankruptcy and Foreclosure Estates

26 Survey/Plat for Construction Projects There is the survey plat that the Developer/Builder needs to show the boundaries/legal; Construction Loan 2 or 3 trip survey

27 Survey Issues for Construction Loans First Trip Has work begun? Second Trip Foundation Check is it in the right place behind set back lines Third Trip lender prerogative to see if the work is as far along as it should be

28 Close on the A & D Loan and transfer the property Record the plat of record with the deed. Once the plat is recorded the county will then give each lot it s own permanent parcel number but that may take awhile; Payoff all of the prior mortgages or receive partial releases to clear up the property

29 Close on the A & D Loan and transfer the property There are usually at least two loans one for the A & D of the land and one specifically for the building of the improvements; Record both of the mortgages; Possible Notice of Commencement; Updates for Draws as construction begins

30 Construction Loans Construction Loans taken out by Developer/Builder or Buyer may own the property; Same process in regard to doing exam and issuing a commitment; Survey required no work should have been done; Draws collect up front when possible

31 Construction Issues Work has begun prior to filing of mortgage; Mechanic liens filed on property as construction is taking place; Lien waivers; Subcontactors/General cut checks

32 Thank You! Questions???

33 Construction and Rehabilitation Financing

34 YOUR INSTRUCTORS Dave Konrad District Manager First Horizon Home Loans Mary Robenalt Porter General Counsel NorthStar Title Services

35 Course Intro & Objectives Realtor Benefits Rehabilitation Advantages Construction Loan work greater than a certain dollar amount $50,000 - $150,000 minimum Rehabilitation <$50,000 Sometimes called a renovation loan Five steps to Financing Sample Scenarios (the Math ) Typical Rates and Fees Q & A

36 Advantages of REHAB Financing Unique ability to use appraised value without property seasoning. Create a ZERO-DOWN solution. Financing the purchase price (or existing balance) and the cost of improvements (both hard and soft costs). Eliminate cash flow issues for your Client by including closing costs, construction interest payments, etc.. into the loan amount. Some lenders use AS-COMPLETE appraised value and lend 95% LTV. FHA 203(k) uses 110% LTV of appraised value. No major repairs allowed.

37 Realtor Benefits Realtor Benefits: Increase sales with Rehab/Construction Loans Sell more homes with fewer showings Generate more referrals by decreasing time on market as Seller does not need to make repairs prior to sale. Seller has availability to more prospects. Update these types of listings to add greater appeal. Homes with Potential become closed deals AS-IS, Motivated Seller, Fixer Upper, Needs Repair, Handyman special Partner with builders/remodelers remodelers for additional referrals Commission paid at initial closing before work begins Sell more rental homes Approximately 10% of HUD sales controlled via firm based in Cleveland Get listing on house they are selling (some lenders require current home to be MLS listed to qualify for loan on new home)

38 Five Steps to Financing Builder Registration Client Credit Approval Construction Project Approval Conference Call Construction Process

39 Step 1-1 Builder Registration Typical Builder Registration & Checklist Builder Registration Form Contractors License/Registration, if applicable General Liability Certificate for $500,000 Registration will be completed within 48 hours In most cases, Lender does not require financial statements from the builder. The Builder/GC must be a licensed registered general contractor Some lenders do not get involved with builder registration whatsoever.

40 Step 2-2 Credit Approval In addition to the Loan Product Guidelines most Construction and Rehab programs have FICO, LTV, and/or Occupancy restrictions over-laid to compensate for additional risk. (ie( ie.. must agree to list home, > 680 FICO, 6 months reserves, etc..) Some lenders treat as a purchase others as a refinance.

41 Step 3-3 Construction Approval Construction Underwriting Dept. will review the construction portion of the file. Full, subject to appraisal (1004) if rehab loan, must have an as-is value. Proof of land ownership or purchase agreement Signed bids or contracts from all contractors or Remodelers Survey or plot plan (if applicable) Builders Risk Insurance (provided by builder or borrower) Plans and specs if applicable Up to 3 contractors per project. For example, roofing, electrical and plumbing The borrower may contract their own subs in this instance. Building permits if not issued generally will be required

42 Step 4-4 Conference Call A pre-closing conference call is conducted to review all of the specifics of the loan and answer any questions. Attendees include: Construction Underwriter Loan Officer Borrower Builder/Contractor Discussion during the call revolves around the following items: Inspection, draw procedures, and schedule Construction interest billing Insurance and modification questions Details of transaction; rate, contract, lot/land, and loan amount Release of funds at closing Estimated construction time Construction lending contacts

43 Step 5-5 Construction Draw schedule determined by scope of work to be completed Builder completes work and requests draw payments from Lender Scope of project will determine the number of draws paid to the builder New Home <180 days (5 draws) Rehab <90 days (3 draws) Borrower pays interest only payments based on funds released for purchase and payments made to the builder Borrower responsible for taxes and insurance during construction

44 Owner-Built Home Loans As an exception, some lenders allow owner and/or contractor transactions where the builder builds/rehabs their primary residence (not a spec house) Typical Owner-Built requirements Borrower is a licensed General Contractor and primary source of income is from home construction Full Documentation Loans only LTV based on costs-not future value 6 months PITI reserves required Add to construction loan rate to compensate for risk

45 Sample Scenarios It s time for the math Please stay awake!

46 REHAB SCENARIO (Zero $ Down) Purchase price: $120,000 Rehab Cost: $ 30,000 TOTAL: $150,000 Interest reserve: $ 1,800 optional Contingency ($ overages) $ 5,000 optional Closing Costs: $ 2,300 optional Modification account: $ 2,500 optional TOTAL of Costs & Fees: $161,600 Appraised Value: $170,000 LTV: 95% Loan amt: $161,600 95% of value = 100% of costs and fees!

47 OTC REHAB Process Overview 1 Submit OTC Loan Buyer Builder Project 2 Close on Construction Loan REALTOR COMMISSION PAID 3 Construction Begins Draws Interest Only payments 4 Nearing Completion Lock Permanent Financing terms 5 Loan Modification

48 PRICING FEES AND RATES

49 Construction & Rehab Fees The following fees are typical for this market AND can be financed into the loan. These fees must be disclosed on the GFE and HUD Title updates: $50- $75 each. After each inspection Inspection Fees: $100 each inspections depending on scope of the project Modification Fee: $125 ($200 for 1st/2nd combo loans). Loan is converted to Client s s chosen program and final loan amount is determined. Construction or Rehab Fee: 1% of the loan amount with a cap or a flat fee scenario

50 Extended Locks Customer may choose to float their interest rate during construction or extended locks may be used to protect the interest rate during construction Float Rate No cost and Construction Fee is waived by some lenders Lock Rate 1% of loan amount for >180 days (credited at modification) w/ float down. This is an applicable fee Bump rate % with float down to market rates within 60 days of modification

51 Thank You! Questions???