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Higher Cost Loan Regulation for Renovation on Prop

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We have a client who currently owns their primary residence and they are wanting to do a major renovation to the property The bank is looking at extending them a future advance – non-revolving loan for 12 months. The loan will be used to pay-out the 1st lien holder and provide funding for the renovations. We have a conditional permanent take out for the loan upon completion and/or the maturity of the loan. Monthly payments will be interest only during the 12 months- renovation phase. The regulation states a Higher Cost loan is: a closed end loan, secured by a consumer’s principal dwelling, for consumer purpose and has an APR exceeding the average of prime offer rate by 1.5% for a 1st lien or 3.5% for a subordinate lien. It excludes: HELOC’s, reverse mortgages, construction only loan and bridge loans with a term of no more than 12 months. Due to some of the variables of our scenario, we are unsure how to treat it. This isn’t a construction from the ground up, it’s not a revolving credit and the permanent take out that we have is conditional. We have conflicting opinions on how this particular situation fits in with the reg. The biggest difference is in how we treat it, on whether or not we have to have the taxes and insurance escrowed during that 12 month period. Our bank does not escrow for any other loans other than Higher Cost Loans which we are required to. Any insight you can offer will be greatly appreciated.

The exact text from 226.35(a)(3) is :

(3) Notwithstanding paragraph (a)(1) of this section, the term “higher-priced mortgage loan” does not include a transaction to finance the initial construction of a dwelling, a temporary or “bridge” loan with a term of twelve months or less, such as a loan to purchase a new dwelling where the consumer plans to sell a current dwelling within twelve months, a reverse-mortgage transaction subject to Section 226.33, or a home equity line of credit subject to Section 226.5b.

Temporary loans are exempt.

First published on 2/6/12

First published on 02/06/2012

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