The current rules aren't much help in this circumstance because I have a purchase transaction. The proposed rules are a little more helpful but not sure if I understand them completely.

The customer is purchasing a home for 135,000. The customer is going to remodel and add an addition, we will be loaning the customer $45,000 to do so and it is included in the total loan of $153,000. The customer is putting as a down payment $27,000 and paying the closing costs. Which is correct for the Calculating Cash to Close?

Total Closing Costs....$10,186
Closing Costs Financed....$0
Down Payment/Funds from Borrower....$27,000
Deposit... -$1,000
Funds for Borrower... -$45,000
Seller Credits....$0
Adjustments and Other Credits...$0
Estimated Cash to Close...-$8,814.00

or

Total Closing Costs....$10,186
Closing Costs Financed....$0
Down Payment/Funds from Borrower....$27,000
Deposit... -$1,000
Funds for Borrower...$0
Seller Credits....$0
Adjustments and Other Credits...$0
Estimated Cash to Close...$36,186

The first breakdown we like because it reflects the cash to the borrower, but the Estimated Cash to Close gives the impression that the customer doesn't have to bring any money to the closing. (However, the math is correct, if the customer didn't bring any money in after all is paid we would owe them $8,814 and they could just keep their $27,000 and $9,186 for closing costs)

The second breakdown shows exactly what the customer must bring to closing but does not at all reflect that at closing we will be giving them $45,000 in cash for their remodel.

I believe the issue with bring in the down payment is for LTV purposes on our books. Otherwise it looks like a "basket loan".

Which do you think would be "most correct"?

Likes to Comply, how did you decide to disclose this situation? I have the same situation right now.

I vote for #2

I would vote for #1 if they are getting the cash at closing. It would be correct that they are getting the 8814.00 at closing - which they are.

Devil's advocate chiming in here.

If you plan on monitoring and dishing out the $45,000 as work progresses...I would never do this loan in this manner for APR disclosure reasons.

I would do a phase 1 for the purchase, a phase 2 LOC for the improvements and then put them all together with a phase 3 for perming it out.