Construction to Permanent Loans in Chicago: Purchase and Renovate

I've invited RWF Mortgage, an affiliate of Wells Fargo, to write about lending programs as a guest blogger. I was interested in buying a house and financing the renovation. Here's one program he pointed out.

Let’s say you’re a buyer in today’s market and you want to purchase a home in your neighborhood but can’t afford the necessary Renovation/Cost needed to bring the home up-to-date. Today’s answer is a Construction to Permanent Loan. A Construction to Permanent Loan is used to acquire a property or a vacant lot, then pay "draws" of the construction loan to a General Contract/Builder to complete constuction or renovation. This is one loan that modifies to an End Permanent Loan after the Final Draw. The permanent loan can be a 30 Year Fixed, 5 Year Arm, etc… The borrower has the ability to lock the rate of the end permanent loan at the opening of the Construction Loan when the project is just starting. The lock can last up to 2 years. The borrower will get a free float down on their interest rate prior to modification, should interest rates go lower.


We recently completed a Single Family Home purchase with a Construction to Permanent Loan. The property purchase and a major addition project to the home were all covered in one loan. The home buyer was required to hire a qualified General Contractor to complete the work. This included extending the back of the home on the first level and adding a large deck. The total cost came to $75,000. The Acquisition Cost of the original home was $450,000. The lender reviewed the sales contract of the existing home, collected the Cost Breakdown ($75,000) and Plans & Specs from the General Contractor to help determine the Finished Value. Along with those 2 things, the Lender took an estimated prorated amount of interest due during the construction period ($15,000) along with the Closing Cost ($5,000), and added these two totals to the Sales Price and Construction cost.

All this added together is the Total Acquisition Cost for the project. The Interest Reserve is an account with the lender that is drawn on each month to make the interest payments on the balance of the construction loan. This interest reserve is an option account, but on this particular transaction, the borrower elected to go with it. The lender lent 80% of this acquisition cost which came out to $436,000. In this case, the appraisal came in a bit higher than the total acquisition cost, so we had no problems proceeding. Should the appraisal have come back lower than the total acquisition cost; we would have lent 80% of the lower amount of the appraisal, which would have required the buyer to put more monies in the transaction. If the appraisal amount were to come back higher than the acquisition cost, the lender will still lend the amount of the original acquisition cost.

During construction, the borrower did not have to make payments while they sold their existing home. The reason, as mentioned above, was an interest reserve account was created to make the monthly interest payments on the construction balance. Also, we did not have to use the buyers existing mortgage payment in qualifying them for the new home. This happens because the construction guidelines understand that the home buyer will sell their existing home or lease the property to a tenant prior to the final draw on the constriction loan.

The 3 main benefits of a Construction to Permanent Loan are the following:

A. Most of the Construction/Renovation Cost can be financed
B. No Payments on the Construction Loan during the construction period
C. Home Buyer’s existing Mortgage on their current home is not used in Qualifying for the new Mortgage (Construction to Permanent). Therefore they don’t need to worry about being able to cover both payments while the home is built/renovated and not does the Lender.

Purchasing a home and completing a renovation or rehab of the property can be easier today than most home buyers think. It’s one solution to improve a property to meet your needs rather than buying an existing home that someone else has customized. A home buyer is able to customize the project to suite their taste. Take advantage of the program in order to have a property that meets all your needs.