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#1855316 - 09/25/13 04:07 PM 18-month construction period question
golden oldie Offline
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the new rule allows the construction period to be "renewed" at the end of 12 months for another 12 months...If you have a construction loan you KNOW will be 18 months, do you order it that way or just order 12 months and then "renew" with a modification at the end of the 12 month period?????
Or renew and extend

I never saw an answer to this question - it went into a home improvement discussion
Last edited by John Burnett; 05/11/18 06:10 PM. Reason: spelling in subject
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#1855401 - 09/25/13 06:21 PM Re: 18-month construction period question golden oldie
John Burnett Offline
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If the construction loan is for more than 12 months or if the initial construction phase of a construction/perm loan is for more than 12 months, the ATR requirements of 1026.43 will apply. If the construction loan or the construction phase can be renewed for no more than a 12 month period, it will enjoy the exemption. See comments 43(a)(3)-1 and -2.

If you start out with an 18-month term for the construction loan or the construction phase of a combo loan, you have to comply with 1026.43 ATR requirements.
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#1855447 - 09/25/13 07:22 PM Re: 18-month construction period question golden oldie
Kathleen O. Blanchard Offline

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It would seem that a construction period for a large home that is known to most likely take more than 12 months should be set up for the anticipated time period (15 months, 18 months, etc), not set up for 12 months with a planned renewal, knowing that is enough time. It seems that the intentional renewal could be viewed as structuring to evade, agreed or no? I would be leery of using the 12 months to get around having to comply with ATR.
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#1855469 - 09/25/13 07:42 PM Re: 18-month construction period question golden oldie
John Burnett Offline
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You may have noticed that I was hedging with my response by not advocating one way or the other. Kathleen has a good point, and I would not want to be defending a practice of routinely understating the construction period and renewing it for larger projects. Examiners might have a dim view of the practice.

Will it have to happen on the occasional project that doesn't wrap up in time? Sure.

So if you do a reasonable number of these longer-term construction loans or phases, I suggest gearing up to underwrite them to meet the ATR limits or one of the QM types you qualify for.
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#1855471 - 09/25/13 07:45 PM Re: 18-month construction period question golden oldie
Kathleen O. Blanchard Offline

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I do see construction projects on larger or more complex homes regularly take longer than a year. I see this frequently enough in some portfolios to be concerned about banks intentionally using 12 months knowing full well it will take longer.

I have no problem with the occasional ones where it should have been 12 months or less but problems arose.
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#2076185 - 04/28/16 05:28 PM Re: 18-month construction period question John Burnett
mardy Offline
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Hi John,

This is an older post but pertains to a scenario we are faced with. If we are looking at an 18M jumbo interest only construction loan to write to ATR requirements for the construction only with a take out commitment. Are we required to include the balloon payment in the calculation for ATR since it would be more than 12M term or can we underwrite for ATR determination the estimated expected 30 year payment once it is sold on the secondary market once construction is complete?

If this were a temp to perm would we be facing the same problem of including the balloon payment due to the construction phase being more than 12M? or is the initial construction exempt period for the balloon payment calculation?

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#2076887 - 05/04/16 01:20 PM Re: 18-month construction period question golden oldie
Antilles Offline
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I have the same question as mardy.
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#2076892 - 05/04/16 01:28 PM Re: 18-month construction period question golden oldie
rlcarey Online
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The 12 month construction exemption rule has not changed in 1026.43.
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#2150602 - 10/20/17 02:05 PM Re: 18-month construction period question rlcarey
JMCBT Offline
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I know this is an old post but would like to expand on it. Our loan committee discussed doing all of our construction loans as 18 month loans. We have had to do a couple of extensions for several loans that have the same builder and they are taking longer than 12 months. We do only temporary construction loans with interest only payments and a balloon payment. What are the risks with doing this?

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#2150618 - 10/20/17 03:36 PM Re: 18-month construction period question golden oldie
rlcarey Online
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You would be subject to HPML, ATR, etc. Just do them for 12 months and extend if not completed.
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#2150648 - 10/20/17 05:20 PM Re: 18-month construction period question rlcarey
JMCBT Offline
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Thank you. That is what we have been doing and it has worked fine.

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#2175262 - 04/25/18 08:52 PM Re: 18-month construction period question golden oldie
jlroberts Offline
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Is a 18 month construction term followed by a 30 yr am allowed (total term 378)? We qualified them on the payment for the P&I 30 yr portion of the loan.

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#2175298 - 04/26/18 12:49 PM Re: 18-month construction period question golden oldie
Dan Persfull Offline
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It would be allowable but if the construction loan's term is greater than 12 months it is not exempt from the ATR requirements.

2. Construction phase of a construction-to-permanent loan. Under § 1026.43(a)(3)(iii), a construction phase of 12 months or less of a construction-to-permanent loan is exempt from § 1026.43(c) through (f). A construction-to-permanent loan is a potentially multiple-advance loan to finance the construction, rehabilitation, or improvement of a dwelling that may be permanently financed by the same creditor. For such a loan, the construction phase and the permanent phase may be treated as separate transactions for the purpose of compliance with § 1026.43(c) through (f), and the construction phase of the loan is exempt from § 1026.43(c) through (f), provided the initial term is 12 months or less. See § 1026.17(c)(6)(ii), allowing similar treatment for disclosures. Where the construction phase of a construction-to-permanent loan is renewable for a period of one year or less, the term of that construction phase does not include any additional period of time that could result from a renewal provision. For example, if the construction phase of a construction-to-permanent loan has an initial term of 12 months but is renewable for another 12-month term before permanent financing begins, the construction phase is exempt from § 1026.43(c) through (f) because the initial term is 12 months. Any renewal of one year or less also qualifies for the exemption. The permanent phase of the loan is treated as a separate transaction and is not exempt under § 1026.43(a)(3)(iii). It may be a qualified mortgage if it satisfies the appropriate requirements.
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#2203082 - 01/15/19 10:58 PM Re: 18-month construction period question golden oldie
Banker75 Offline
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Question in regard to this topic. We are looking at implementing construction to permanent financing in one transaction as we have not had this before. So, for construction to permanent loans that are initially longer than 12 months (18), would the bank verify the consumer's ATR after the initial 12 months and then again at the permanent financing stage? My apologies as I'm trying to clarify this for management. Any help is appreciated.

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#2203483 - 01/18/19 08:49 PM Re: 18-month construction period question golden oldie
raitchjay Offline
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You have a construction-perm loan with a term of 18 months? That doesn't sound like there's any perm in it. If you are doing a construction-perm all in one, you'd verify the ATR prior to consummation--that's it (at least, from an ATR perspective, that's all you'd have to do).
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#2203758 - 01/23/19 08:46 PM Re: 18-month construction period question golden oldie
John Burnett Offline
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I get the sense that Mustang Mama's bank wants to go the route of the one-note closing and using a modification to morph the loan into perm financing. Putting my own dislike of such practices aside, and assuming it doesn't run into state legal trouble, it can be done, if it's not a refinancing under § 1026.20(a) of Reg Z. But under § 1026.43, the ATR requirement would apply to the 18-month loan, period, including its obvious balloon payment requirement.
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#2256441 - 07/08/21 06:58 PM Re: 18-month construction period question Dan Persfull
dhm3556 Offline
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So the documents required for this construction/permanent loan would be an (1.) extension for the construction loan for another 6 months and (2.) disclosures to the customer for the change in dates for the 30 year permanent loan? Due to Covid and delays with contractors we are running into 2 or 3 loans like this.

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#2256570 - 07/12/21 05:42 PM Re: 18-month construction period question golden oldie
John Burnett Offline
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Yes to #1. Possible Yes to #2, if there are increases in cost estimates over those originally disclosed for the permanent loan within three business days after receiving the application.
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