Board Topic: Converting construction loan to permanent loan
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Converting construction to permanent

Posted by: Infinity Sep 18 2003, 08:03 PM
My construction loan was set by the bank for 9 months. We are approaching that time (1 week), but the house has another 2-3 months to go until completed. The bank has stated that they want to convert the construction loan to a fixed mortgage now, and start payments, even though the house is not complete. They will place the final builder's draw into escrow. It seems like a good deal, since my construction loan rate is 2% higher than the rate they are offering for the permanent loan, and at some point I have to start paying it anyway. However, I've never heard of taking on the mortgage before the house is complete. Is there a downside to this? They are saying 'no', since they will still have the final inspection before releasing the escrow money, but it just doesn't seem logical. They are not too thrilled with the idea of extending the construction loan, but 'may' do it if we lock into a higher fixed rate for the mortgage. This is through a large national bank, so I think they are honest - just seems illogical. Thoughts?

Posted by: loanuniverse Sep 19 2003, 05:07 PM
Hello Infinity:

Sorry for the delay in answering, but I have been enjoying my vacation smile.gif Let me start by saying that I am not a residential lender, and that I am far from being versed in residential construction loans and how they convert into permanent mortgages. Therefore my recommendation would be to contact a real estate lawyer that works for you to help you determine the possible pitfalls that doing the conversion before the building of the house is over might bring along. While I do not have the answers to your questions, I do have some observations that you might want to think about when you talk to the attorney or maybe to the bank.

1- Assuming that the construction loan includes for a walkthrough of the completed property by you This is known as the final walkthrough. Will this be in place for the final draw that is going to be placed in escrow? I would definitely want to make sure that the house was in the shape that I wanted before the builder is paid. Also you want to be involved in the decision, do not leave the inspection to the bank. They might not care if the window is a bit crooked, but you might since you will be staring at the window for years.

2- To make a decision between going ahead with the closing now or postponing for the higher rate, you need to figure out the difference in actual money.

3- It just occurred to me that the closing is not being postponed because of you, but because of the builder. Do you have a loan agreement specifying a specific rate at conversion? What are the clauses regarding the event that the completion of the house is delayed? You are not at fault, but it seems like you are somehow being forced into closing now on a house that is not complete or having to pay a higher interest rate. You need to talk to an attorney about this This is very unfamiliar to me, but it seems like there should be some penalties somewhere for being 3 months late. Maybe your recourse is with the builder and not the lender, but who knows.

4- I agree that a large bank might not be out to be dishonest, not even a small bank will be out to be dishonest. I would recommend being tactful, but forceful. Buying a house is usually the largest investment any of us do, so being informed when doing so is the best thing.

Sorry, I could not be of more help.
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