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#2042644 - 10/05/15 08:51 PM Purchase/Renovation vs. Construction/Perm
MDShoregirl Offline
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Could someone please give me a good explanation of the similarities and differences of a purchase/renovation loan vs. a construction/permanent loan when both will have a draw period? I don't feel that I'm explaining it very well and now that TRID is in effect does it really make any difference at all?

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#2042661 - 10/05/15 09:27 PM Re: Purchase/Renovation vs. Construction/Perm MDShoregirl
rlcarey Online
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Galveston, TX
The biggest issue will probably involve the calculation of the APR, but that has nothing to do with TRID. You are going to have to get much more specific for someone to give you any guidance.
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#2042680 - 10/05/15 10:10 PM Re: Purchase/Renovation vs. Construction/Perm MDShoregirl
MDShoregirl Offline
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OK, more specific...I'm told that our bank has done construction loans for renovations on existing structures and then "converted" them to permanent financing (like a construction/perm). But what I hear is... that temporary financing morphed into permanent financing without a second settlement for permanent financing and we might have titling issues. So I say... that a loan to purchase and renovation a primary residence is not a construction/permanent loan by definition. My goal is to determine that we have applied Reg. Z and RESPA correctly. At this point the conversation devolves into a product specification discussion with the majority saying that we treat both types of loans as construction/perm. The conversation has been ongoing for two weeks. Today is the first working day for the new TRID rules and certain loan exemptions have gone away. My feeling is that the term "construction" is being misused without a true understanding of what that term means in the lending area. They think I'm nitpicky. (It's all good, we really do get along.) Given the new TRID rules, what (if any) are the pitfalls to treating both types of loans as construction/perm?

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#2042687 - 10/05/15 10:31 PM Re: Purchase/Renovation vs. Construction/Perm MDShoregirl
rlcarey Online
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Well, unless your legal counsel was involved in these discussions, then all of that hot air has been a total waste of time. smile

First, you have to decide what your product is and how from a legal standpoint do you approach it from a legal documentation standpoint to ensure that you have a enforceable loan contract and security agreement under State law. For example, is this a short -term temporary loan for the purchase and renovation and then followed by a permanent take-out loan, is it a one phase closing, two phase closing, etc., etc.. You have to start there and then you can start to figure out how to disclose the product. Product design comes first. Risk analysis and disclosure compliance come second and third.
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#2042694 - 10/05/15 11:13 PM Re: Purchase/Renovation vs. Construction/Perm MDShoregirl
MDShoregirl Offline
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Thank you...legal counsel was consulted today and he is fine with treating them the same (that's what I heard anyway). I'm not entirely comfortable with this. They want to do a one phase settlement, which to me means a "purchase" regardless of whether they withhold funds for the renovation draws. Am I wrong in thinking that a construction/perm has two distinct phases? Currently, we don't escrow during the construction phase but on a purchase/renovation shouldn't we escrow immediately? Are there any other issues?

Also, going forward, would it be of any benefit to distinguish purchase/renovations loans with different product or class codes?

Or am I being nitpicky?!

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#2042698 - 10/05/15 11:35 PM Re: Purchase/Renovation vs. Construction/Perm MDShoregirl
rlcarey Online
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I think you are confusing your terminology with that of the TRID regulations. For example, a construction loan where the first draw buys the lot on which the building is going to be placed is a purchase loan, a construction loan in which the first draw pays off an existing lot loan is a refinance loan, and a construction loan to someone that already owns the lot free and clear is a construction loan.

How these are classified under TRID as product types has no bearing on the rest of the disclosures. It all is based on the legal obligation and how such things as payments and finance charges are calculated and disclosed along with all the other fees involved.
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#2042750 - 10/06/15 02:18 PM Re: Purchase/Renovation vs. Construction/Perm MDShoregirl
RR Joker Offline
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And don't be surprised with a Purchase/rehab under TRID if you don't now have to disclose those two loans separately. One for the purchase and one for the rehab (equity). That's what we will have to do going forward. Just sayin.
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#2042940 - 10/06/15 08:27 PM Re: Purchase/Renovation vs. Construction/Perm RR Joker
MDShoregirl Offline
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That is exactly my concern. I’m afraid that by treating renovations like construction/perm that we will miss something. (Not that I don’t have confidence in a lawyer who makes a 5 second decision! grin )

I just want to get it right.
Last edited by MDShoregirl; 10/06/15 08:34 PM.
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#2058071 - 01/12/16 04:54 PM Re: Purchase/Renovation vs. Construction/Perm MDShoregirl
sbrelje Offline
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RR Joker, can you elaborate on why you will do them as two loans under TRID now?

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#2058076 - 01/12/16 05:03 PM Re: Purchase/Renovation vs. Construction/Perm MDShoregirl
rlcarey Online
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RR Joker, can you elaborate on why you will do them as two loans under TRID now?

Not RR, but it probably has to do with the disclosure limitations of the LOS system. I'm not aware of one that would handle it correctly.
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#2058091 - 01/12/16 05:47 PM Re: Purchase/Renovation vs. Construction/Perm MDShoregirl
RR Joker Offline
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Yes...sure...and they should have been done this way all along...it's just with our TRID software, it won't allow a mixed up mess.

Closed-end draw loans are calculated under Appendix D (50% rule). If you try to combine the two, you would know what the first draw would be...the purchase, which is likely a large portion of the whole deal. How will you calculate a blended APR? Do you have the staff to calculate that by 'hand'? I don't know of any system that does that.

Therefore, it occurred to me that although we could 'do' a combined loan before...it did not make it right! SO, this put a stop to it. crazy
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#2058092 - 01/12/16 05:47 PM Re: Purchase/Renovation vs. Construction/Perm MDShoregirl
RR Joker Offline
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(Randy beat me to it while I was called away in the middle of writing my reply! laugh! )
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#2058096 - 01/12/16 05:54 PM Re: Purchase/Renovation vs. Construction/Perm MDShoregirl
sbrelje Offline
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So you do a purchase loan in 1st position and an equity loan in second position?

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#2058100 - 01/12/16 05:59 PM Re: Purchase/Renovation vs. Construction/Perm MDShoregirl
RR Joker Offline
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It would all be first position...it's the same bank...just an additional advance to the first DSD.
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#2058105 - 01/12/16 06:11 PM Re: Purchase/Renovation vs. Construction/Perm MDShoregirl
sbrelje Offline
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Sorry for all the q's but you are really opening my eyes to new options right now!

Is your equity loan temporary or is it a term loan that doesn't require a refinancing?

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#2058130 - 01/12/16 06:44 PM Re: Purchase/Renovation vs. Construction/Perm MDShoregirl
RR Joker Offline
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Typically, our purchase reno's are both temporary. Once the reno is completed, the two loans are combined into one 'permanent' loan either by us, or by a secondary market lender.
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#2058150 - 01/12/16 07:20 PM Re: Purchase/Renovation vs. Construction/Perm MDShoregirl
sbrelje Offline
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Ok, thanks!

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#2058151 - 01/12/16 07:24 PM Re: Purchase/Renovation vs. Construction/Perm MDShoregirl
sbrelje Offline
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Are either of these loans HCML?

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#2058167 - 01/12/16 07:51 PM Re: Purchase/Renovation vs. Construction/Perm MDShoregirl
RR Joker Offline
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No.
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#2058222 - 01/12/16 09:22 PM Re: Purchase/Renovation vs. Construction/Perm MDShoregirl
ahkcompliance Offline
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We use the same system as RR Joker and we are treating the equity loan as a term loan.

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