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  • Alex Press

Partial Funding of Construction Loans - FHA and VA Commune With Banks


The partial funding of construction loans is very rare and almost never seen in history. The primary reason is due to the loss of lenders during the financial crisis, which took place in 2008. All banks require borrowers to fund at least 10% of the cost, which would include the holding deposits and draw down from home equity lines of credit. This means that a borrower who wants to borrow $200,000 would require deposits of $20,000 and a line of credit on the property equal to 10%.


Banks and lenders are reluctant to lend more than 90% of the purchase price, however, Partial funding allows construction to proceed while the bank secures the remaining funds. There have even been instances of construction loans reaching 100% of the price, often immediately after the main developer has completed the necessary due diligence and has filed title and closing of the project. In such cases, once the full deposit has been provided, the bank will begin to advance whatever additional funds are necessary to pay off mortgage debt.


So, while it is much more convenient to obtain additional funds when the price of a property has been reduced, additional funds should not be used as short term capital reserve funds. If these funds aren't needed immediately, they should be unavailable once the main developer is ready to bring the project to completion. In the early stages of the project, when the financial target is to be met, the larger delays will be compensated for with the use of a large construction loan having requirements much greater than normal, stricter bank requirements. If a borrower borrows $200,000 for a one year project it would take only 12 payments (24 months) to make the loan pay off due to loan amortization and interest. Conditions cannot exceed six months, a long time from a bank closing to a final closing.


Checklist #1 - Settle all outstanding lender/project related fees.When a construction loan is closed, the lender will charge certain fees for closing, transfer Performa as applicable. These fees will be paid by the borrower, lender, or purchaser.a. Lender's escrow or earnest money, for example.b. Attorney, title, escrow, or escrow.c. Loan origination, underwriting, and underwriting fees.d. Recording or form fees.e. Appraisal fee.f. Flood determination or soils Nap portion certification fee.g. Surveying, charts, and UCC survey expiration date fees.h. Title insurance, flood insurance, or fire insurance premiums.i. State, local, and federal tax, estate, divorce, gift, income, and other assessment fees, license fees, and or related fees.j. Tenant protection, landlord or tenant elategic, and tenant fraud fees.k. Lessor's association or condo fees.l. Title company fees.m. Payday government recording, transfer, and reservation fees.


It is a great benefit to have full capitalization during the construction phase because it allows for immediate funding of the balance needed for your closing. So, ensure that all necessary funds are available ahead of time so that you can close on time and move into your new home!


Checklist #2 - Set up lender escrow.o. Mortgage broker's fee plus any and all additional points and fees.o. Attorney fee plus any and all other fees such as those for school entrances' certificates, employee payments and pro rated school, substitute, taxes, etc.o. Preliminary closing or end closingo. Any document closing costs (appraisal, flood certification, and land release tax).o. Subordinate Illinois attorney fees, Arizona court fees, and any other costs not previously agreed upon.o. A new fully indexed tax return or separately filed return is required once escrow closes.o. Closing or escrow should not be between 45-60 days. Additionally, if there is any recorded contingency within the contract, it must be funded within 90 days of closing in order to close.o. A lender or the seller's broker shall not charge any fee to a new buyer other than an appropriate nominal fee to record the provisions.o. Closing agent shall not commit or charge any broker fee unless this is agreed upon in writing in advance.o. Unless otherwise agreed in writing, no late fees and no prepayment penalties can be charged to the borrower prior to closing.o. Late fees are subject to the same provisions as the purchase price and payment is received and properly accepted.


With these tips in mind, you are now better prepared for success!