Using the Permanent/ Construction Loan to Finance Fixer Uppers
Most people know that fixing up a run down property or adding space to a small one, can be an excellent way to create value. Often, buying a house in need of repair is the only way a young couple can afford a home in the area in which they truly want to live. But, as anyone knows who had tried to buy a fixer upper, financing can be a problem. Most lenders will not make a loan on a property in poor condition. And even if as is financing can be found, the owner must somehow find the money to do the needed repairs.

The Permanent/Construction loan is an excellent solution to this problem. A Permanent/Construction loan is really a single 30 year fully amortized loan used to accomplish two things:

Unlike ordinary mortgage loans, the maximimum loan amount for a permanent/construction loan is base on the Completed Value of the project The Completed Value is determined by the appraiser who analyses the plans and contractor's Cost Estimate and Description of Materials for the proposed construction and evaluates the property as if the project were completed.

Terms
While thePermanent/Construction loan is a single 30 year loan, the terms are a little different from a standard mortgage loan. For the first year, during the construction period, the loan is paid on an interest only basis. Interest is normally paid only on funds actually drawn down. Those funds remaining in the construction escrow account generally do not bear interest.

After the interest only period, for the duration of the 30 year term, the loan is a fully amortizing loan. The borrower can choose between fixed rate and adjustable rate mortgages. Normally there is no prepayment penalty.

Because the Permanent/Construction loan is actually a combination of two loans, a rather labor intensive construction loan and a permanent loan, the fees are somewhat higher than normal. The processing fees will also be slightly higher. Keep in mind that the appraisal will cost more also, probably at least $500 to as much as $750 for a single family residence depending on size and complexity.

The contractor issue
Unless the borrower can demonstrate a solid track record of successfully completing similar projects, the lender will require a licensed contractor be used. The contractor will be required to complete Cost Breakdown and Description of Materials forms. These will be included by the appraiser in the appraisal report, along with the plans. The contractor will also need to fill out a financial statement and provide references.

Types of properties
Normally these loans are limited to residential properties with no more than four residential units. There are similar programs available for apartment buildings and commercial properties. For rental properties, the rates and margins will be slightly higher and the required equity will be increased. Generally a down payments of twenty five percent of the "as is" price is required for a non-owner occupied property. As with the owner-occupied loan, the cost of all of the construction can be included in the loan amount.

New construction
The Permanent/Construction loan can also be used to finance the construction of a new house. The same loan terms and loan to value guidelines apply.

Closing the loan
Because of the complexities involved in a construction loan, it takes longer than normal to close. Remember that the appraiser cannot complete the report until the contractor can provide the Cost Breakdown and Description of Materials forms based on the plans. And of course the underwriting process for a construction loan is more involved than for a standard loan.

We have successfully used the Permanent/Construction loan for everything from properties with relatively large pest reports to major rehabilitation projects and new construction projects. It eliminates the need for finding an 'as is' lender and uncertainty of finding a permanent lender after the project is complete. This loan gives the borrower the peace of mind of knowing that ALL aspects of the project are covered - the funds are available to complete the project and the permanent loan is provided for up front.he above categories do not rule yourself out of the lending game. Call a qualified lender.

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