Your Blueprint For Constructing or Renovating Your Dream Home An informational guide for completing a successful construction or remodel through the construction loan process. Provided to you by:
Table of Contents Construction to Permanent Financing... 1 The Construction/Renovation Loan Process... 2 Vacant Lot Loans... 3 Basics of Bids, Draws, Cost Overruns... 4 Cost Overruns... 5 Draw Request Form... 6 Appraisal Value... 7 Construction/Renovation Loan with Permanent End Loan... 8 Ready For Inspection? Done Means Done... 9 Your Way Renovation... 10
Construction to Permanent Financing is as Easy as 1, 2, 3... Step 1 Apply online at www.merchantsbank.com. After reviewing your application and other information, you will be notified if you ve been preapproved for both a construction and permanent loan. For qualified applicants, a minimum down payment of 5% is required if the purchase price is under $417,000. If the purchase price exceeds $417,000, a down payment of 10% will be required. With a 5% down payment, you will have a single loan with mortgage insurance at 95%. Step 2 Once plans and specifications are received from the builder, an appraisal can be ordered. After I receive the appraisal, your loan package will be submitted for final approval, for both the construction and permanent loans. Step 3 Upon approval, you can close on the construction loan. If applicable, your lot will be paid off with the first draw, title transferred to your name, and closing costs are paid. The builder will typically take draws (payments) throughout the construction phase. During the construction process, you will only be charged monthly interest payments on the amount of the loan advanced. At completion, the loan may be modified into a permanent loan without paying closing costs a second time (subject to credit approval). The only costs associated with the end closing are the final inspection fee and any interim interest. Escrows will also be set up for your property taxes and homeowners insurance. Step 4 Once the home is within 85 days of completion, you have the ability to lock the interest rate on the permanent loan. Merchants Bank offers 30-, 45-, 60- and 85-day lock options. Once the loan is locked, you cannot re-lock. If you choose an 85-day lock, you will be required to submit a check to Merchants Bank, BUT that amount is reimbursed once your closed loan package is complete. If you choose a 30-, 45- or 60-day lock you will not pay an up-front fee. Step 5 When the home is complete the appraiser performs a final inspection and that along with updated income and asset documentation is submitted to underwriting for approval on the construction loan modification to make the loan permanent. If approved, you close on your home and move in. Page 1
The Construction/Renovation Loan Process If you are thinking of building or renovating, you may already have a home design in mind. You may already have an idea of how much you want to spend. And you may already have a blueprint of your dream home. But do you have any idea of how to get there? That is where you ll see the benefits of working with a mortgage professional at Merchants Bank. We will guide you through the whole process from start to finish When you meet with a Mortgage Loan Officer at Merchants Bank, we will provide you with the detailed process, a set of steps that will lead to your dream home. Here is an example of what you can expect: Your liquid funds needed to close and for reserves: We ll need to verify the funds you have in-hand and may ask for the following types of verification: Bank statements (checking, savings, money market, etc.) Remember to include the complete statement Gift of funds letter Investment statements Please remember to include the complete statement Paper trail on items you ve sold Retirement savings statement Please remember to include the complete statement Bridge loan, as an option if you have a home to sell during or after the construction process Explanation of any large deposits or withdrawals on any of your statements Helpful information to bring when applying: r W2 s and federal tax returns for the past 2 years r Most recent pay check stub covering last 30 days r Most current months statements for bank and/or investment accounts r Recent 401(k) or retirement account statement r Driver s license or photo ID r Confirmation of student loans, if applicable (even in deferment r A list of assets Page 2
Vacant Lot Loans Ideal for someone who wants to secure their building site in advance of new home construction 10% Down Program Up to 40 acre lot size acceptable Larger parcels allowable with larger downpayments We service these loans locally Page 3
Basics of Bids, Draws, and Cost Overruns You ll need to identify who the contractor is. Are you using: General Contractor Being your own contractor Purchasing a Modular Home Whomever your contractor is, you will be required to provide Merchants Bank with: Copy of signed Construction Contract Sworn Construction Agreement, specification sheet, blueprints/plans Any sweat equity credit has to be supported by a third party bid for labor About the Sworn Construction Statement: This is your budget Ensure your budget is complete and you re not missing any details It s safer to put high bids on your Sworn Construction Statement you can still choose to go with the lower bids which may include: Flooring Plumbing Fixtures Realize that your appraised value will be based on these bids, so be sure to document any changes in materials used as they can affect the end value. For example: An upgrade from vinyl to ceramic flooring A downgrade from a bay window to a straight window If you decide to add items for which you did not submit a bid on the original Sworn Construction Statement, be prepared to pay for it out of pocket. It may not be able to be funded from your loan. If your contractor gives you an allowance get actual bids for those items so you know you are within your budget. You should budget a line for cost overruns, since surprises tend to arise. We allow up to a 10% overrun line as long as it is supported by the appraised value. Page 4
Cost Overruns What is a Cost Overrun? If you have a bill that exceeds your Sworn Construction Statement (budget), or if you have a bill that was never originally included in your Sworn Construction Statement, then you will have a cost overrun. If your Sworn Construction Statement budget included a cost overrun line, you can fund the amount of the overrun out of that category, unless it has already been used for previous overruns. If overruns were not built into your Sworn Construction Statement (budget), you can decide if there is another line item you can save on and transfer funds to this line. For example: If you spend $500 less on carpet to fund a $500 overrun on plumbing or fixtures. This is acceptable as long as this isn t a downgrade to decrease the final appraised value. If there isn t any money left in your original budget, in any category, you should be prepared to pay for the overrun from your liquid assets. This could affect the approval of your permanent-end loan. What is a Change Order? A change order occurs when you want to change something in your home. You should fill out a change order form to document the changes with your contractor and submit that to your attorney/title company. A change order would apply if you change anything in the Sworn Construction Statement such as: Changing basic kitchen appliances to stainless steel Changing oak flooring to cherry flooring The change order could cause a cost overrun Page 5
Draw Request Form What is a Draw Request Form? A draw is an advance against your construction/renovation loan. In order to advance funds, the following must be taken into consideration: Draw categories must match the bid categories on the Sworn Construction Statement. Your contractor will submit the draw request to your attorney/closing agent. As the owner of the home and owner of loan you must sign off on the request agreeing that you want Merchants Bank to advance the funds. We will inspect construction in process at various stages, to be sure work that is paid for has been completed. In some instances you may not be reimbursed for items purchased outside of the Sworn Construction Agreement. We compare the amount of the draw with the line budget amount in the Sworn Construction Statement. If the draw is within your budget we issue a check. If not, it is a cost overrun. Remember, this may not be reimbursed. Page 6
Appraisal Value What is an appraisal value based on? Your appraisal will be based on your plans, specifications and construction contract as completed. It assumes you will build what your plans call for, so if you omit the deck to save money your value will also wind up being lowered. If you add items during the construction, those items will need to be documented so the final value at completion is adjusted. Please note: not all items add value dollar for dollar based on the cost. Market demand influences value. Comparable homes will be used to arrive at the appraised value. Homes with like locations, size, and amenities that have actually been sold are an important part of the appraisal. Providing your appraiser with accurate information is very important: What materials do you plan on using, for example, Indicate ceramic vs. vinyl rather than just flooring Any extra s or built-ins you have planned, or added during the process Indicate custom vs. stock materials (e.g. cabinets) Beware of Over-Built for the Market Over-built means your home has amenities not typical for the market you may have to pay for these as they may not add value to the appraisal. Examples of some of these amenities may include: Four car garage when your market only supports a three car garage Swimming pools in cold climates Out buildings not typical for your area such as a pole shed, silo or barn located in a residential setting Page 7
Construction/Renovation Loan with Permanent End Loan Loans: Short Term Always estimate longer than as anticipated for the completion. You will be billed interest only each month on the amount of your construction loan that is drawn. As the amount drawn increases, so will your interest due. Rate: You will have a construction rate during the construction phase. This will change when the loan is permanently financed at the conclusion of the construction phase. Loan Costs: The following costs may be associated with a construction or renovation loan: Origination Fee Title Insurance Attorney Fee Mortgage Tax Appraisal Fee Credit Report Disbursement Fee Underwriting Fee Flood Certification Inspection Fees (Some items may have to be updated prior to permanent loan closing) Page 8
Ready For Inspection? Done Means Done Once you have decided that your construction is done and ready for final inspection that means everything is done and finalized. The final inspection will review all the final details. Remember to include: Trim is installed Flooring is installed All the little details are finalized Depending on the season, outside weather related items may be escrowed at 1.2 times the bid. This means the money budgeted for these items will be held until a certain date when the item must have been completed, usually June 1. Inspection will determine escrowed funds to be released. Your permanent loan rate cannot be locked until all bids are submitted. This gives the title company and Merchants Bank the final loan amount, which is necessary before a rate can be locked. Once all bids are submitted and we know the final loan amount, the completion/final inspection will be ordered. Prior to permanent loan closing, we will ask for the following current documents: Pay stubs for one full month Most recent bank statements for two full months (checking, savings, money market, retirement, etc.) Remember to include the complete statement. A list of assets Remember to avoid exceeding the construction term. Extension costs may apply. Know your credit Things to keep in mind during the construction process: Do not charge up your credit cards during the construction phase. This may affect your debt ratio for your permanent loan. Do not miss any payments during your construction phase or you may no longer be qualified for a permanent loan. This includes your construction loan interest payments as well as all other loan and credit card payments you may have. Do not take on other new debt obligations during the construction phase without first checking with your loan officer to be sure it doesn t affect your permanent loan approval. Be aware of changing employment. If you have to change jobs, make sure your income doesn t decrease and it is not a change in profession. This may affect your permanent loan approval as well. Page 9
Your Way Renovation Your Way Renovation allows borrowers to make improvements after closing on the property they purchase. Here s how: Merchants Bank is offering a renovation loan that accomplishes two goals: To purchase property To improve property Merchants Bank will offer the approved buyer a low rate, interest only financing during the renovation period Once a purchase agreement is secured, the buyers get estimates on the work to be done. Merchants Bank will order an appraisal based on After Improved value. A home inspection is required from one of our approved inspectors Merchants Bank will then modify or refinance the renovation loan to permanent financing after all improvements are complete. The permanent loan is based on inspection after completion based on the original improvement plans. Maximum financing is available to approved borrowers** Investor loans are allowed for 1-2 unit properties Refinance and renovate an existing property that you own **Maximum financing is the highest loan-to-value which varies based on the loan product. Page 10