Construction/Renovation Mortgage

The construction to permanent loan application requires the same documents as a conventional home mortgage, including bank statements, proof of income and tax returns. Other considerations include cash down payments, whether the borrowers already own the land, and the loan to value (LTV). It is difficult to get a 100% LTV construction to permanent loan. Interest rates may be fixed or may float until conversion to a permanent loan.

Special Documents on the Construction to Permanent Loan

On a construction to permanent loan, the appraisal assesses the finished property's value instead of the current value. The loan amount is based on the finished value.

The construction to permanent loan process also requires a detailed cost estimate from a licensed and reputable contractor. The estimate includes both “hard costs” - materials needed to construct the home - and “soft costs”, which are incidental fees and services that will be incurred during home construction. Once the lender approves the loan, the borrowers can enter the construction phase.

The Construction Phase

ESB construction to permanent loans can allow up to eight (8) months to complete the building phase. The loan takes the form of a construction line of credit disbursed by the bank in “draws” as the construction progresses. The contractor completes a percentage of construction and submits an invoice to the lender. Make sure the lender inspects the construction to assure that it was completed and up to code before disbursing the payment to the contractor.

You should inspect the property regularly during the construction process and bring up any issues as soon as possible. However, try to stick as closely as possible to the original plans as change orders are costly and can exceed the construction budget.

During the construction phase, the construction to permanent loan is interest-only, but many construction to permanent loans build an “interest reserve” into the construction budget. Borrowers can defer paying on the loan until it converts into the permanent mortgage. 

End of Construction

When the property receives its permanent certificate of occupancy from the municipal building authority, construction is considered complete.

Keep in mind that “complete” may be different in a contractor’s mind than in the client’s mind. A building can receive a certificate of occupancy even though bathroom fixtures have not been installed and other finishing touches have not been applied.  During final inspection, you create a “punch list” of items that must be finished before the contractor gets final payment.  After the bank pays the final draw, it can be difficult to get a contractor’s attention.

After construction is complete, the construction to permanent loan transitions to the permanent phase. The loan converts from a line of credit into a permanent mortgage, usually with a 30-year amortization period and fixed monthly payments.  The principal of the permanent loan will be the sum of the total construction hard and soft costs, the interest reserve, and any unpaid closing costs.

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Elmira Savings Bank is an approved Seller/Servicer of Freddie Mac, FHA/Department of Housing & Urban Development, VA, USDA, and SONYMA (NY Only). Elmira Savings Bank is an Equal Housing Lender committed to ensuring every applicant for credit receive fair and equal treatment throughout the credit application and approval process, as embodied in the Equal Credit Opportunity Act and the Fair Housing Act. All mortgage lending products are subject to credit and property approval. Rates and program terms and conditions are subject to change without notice. Not all products are available in all states or for all amounts. Other restrictions and limitations apply.

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