Frequently Asked Questions and Glossary of Terms
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Q. How are payments made and calculated?
A. Depending on the loan program, interest is calculated on the AMOUNT ADVANCED, not the entire loan balance. Other lenders offer programs with no fees - the catch is the borrower pays on the ENTIRE loan amount immediately. This results in a much higher out of pocket expense. The lender may set up an "Interest Reserve", which covers interest for a set period of time (usually the term of the loan).
Q. What is the difference between a One-Time close versus a Two-Step close?
A. A Two-Step close offers more loan programs (i.e. 30-year fixed mortgages, etc.) and lower rates. Borrowers may also choose a no-closing cost mortgage loan - please visit www.hlmcolorado.com/mortgages.
Q. How are cost overruns handled?
A. It depends on the lender. Typically, cost overruns are paid out of the borrowers pocket. A "Second Mortgage" or "Modification" may be requested, increasing the funds available. These requests are typically more difficult to be approved on a One-Time close versus a Two-Step Close.
442: A Satisfactory Completion Certificate report issued by the original appraiser for the property. At the end of the construction phase of the one-time close loan, an inspection and reappraisal of the property is ordered. The appraiser completes the 442 certifying that the project is complete and that the property value meets the original appraisal.
1003: Uniform Residential Loan Application. A standard loan application form issued by the Federal National Mortgage Association (Fannie Mae).
Agency Appointment: A legal directive given to the bank from the borrower to make all draw checks payable to the builder only. The final disbursement is made payable jointly to the borrower and builder.
Allowance: A maximum amount for a non-fixed cost on a cost breakdown for an item the borrower chooses, such as carpet or tile.
Amortization Term: The number of months used to calculate the repayment of the loan; does not include the construction period.
Articles of Incorporation: The legal documents that establish a corporation. The corporation's purpose should be for constructing homes.
Assessment: A local tax levied against a property for a specific purpose, such as road or sidewalk construction or sewer or street light installation.
"As-Built" Appraisal: An appraisal that is based on the value of the project assuming all construction has been completed. It included land value. The appraiser uses the builder's line-item budget, the plans and specifications, and local market criteria to arrive at the appraised value.
Bearing Soil: Soil that is sufficient to support the weight of a house built on it with minimal settling. If a lot has fill dirt, it may increase excavation costs to locate bearing soil.
Blueprints/Plans: Architectural plans provided by a licensed architect or builder. They provide a complete overview of house the project will be constructed, including all necessary architectural and structural issues.
Custom Builder's Resume: Resume is completed and signed by the builder, who authorizes the bank to: a) obtain a business and personal credit report, and b) to contact references.
Builder's Risk Insurance: An insurance policy carried by the builder/contractor that provides specific coverage of the physical structure of the building in case of fire, accident, etc. This coverage is required for all construction loans and must be carried by the builder/contractor or as Course of Construction Insurance by the borrower. The bank must be named on the policy as Lender Loss Payee.
By-Owner Items: Items in a construction project the borrower is planning to pay for or complete outside the terms of the construction contract.
CC&Rs: Covenants, Conditions, and Restrictions. The limitations and requirements connected to the ownership of a piece of property. These are provisions written into deeds requiring or preventing certain uses of the property.
Certificate of Occupancy (CO): A certificate issued by the city, county, or local authority approving the construction as complete and the house as ready to be occupied.
Change Order: A form used by the builder and homeowner to authorize a change in the contract/budget. The change could impact the timeframe, cost, materials, and/or labor; therefore the bank must be consulted on any change order.
Cloud on Title: An outstanding claim or encumbrance that, if valid, would affect or impair the owner's title.
Conditional Lien Release: A document signed by a contractor, subcontractor or material supplier that waives the right to file a Mechanic's Lien if payment is received for work performed. This release is submitted during the construction period or at completion of the project.
Construction Costs: These are all of the items required to complete the construction of a home: off-site, on-site, land value, closing costs, contingency, and interest reserves.
Construction Loan: A short-term interim loan to fund the construction of buildings or homes, which usually advances the money in periodic disbursements as work progresses.
Construction Loan Agreement: A closing document that spells out the parameters and conditions of the construction loan, as well as the responsibilities of all parties associated with the loan. The bank and the borrower signs this document at closing.
Construction Term: The actual term of the construction phase of the loan. It is stated in months: six, nine, twelve, or eighteen months are typical options.
Contingency Reserve (Lender's Contingency): A reserve account usually equal to 5-10% of the Direct Costs of the construction project. The funds are held in reserve and are available to cover any unexpected construction overruns or severe problems. Any funds remaining in this account at the completion of construction are applied to the permanent loan as a principal reduction prior to payment re-amortization.
Contractor's License: The criteria in almost all states for licensing tradesmen. If the tradesman passes the periodic requirements, a license is issued or renewed by the state.
Corporate Borrowing Resolution: Sometimes found in the Articles of Incorporation, it states which principals of the corporation are authorized to financially obligate the corporation on loans and conduct other financial affairs on behalf of the corporation.
Cost Breakdown (Line Item Budget): A detailed listing of the actual costs of the construction project, including the cost of labor, all building materials and any other costs associated with construction. A cost breakdown is used to itemize the fixed construction costs into categories (line items) for budgeting the overall project expense. Banks require this form on every new construction and remodel/renovation project.
Cost-Plus Contract: A contract to build a house that is not based on firm bids, but rather on whatever the cost may be at the time, plus a percentage for profit.
Cost Overrun: The amount of funds over and above the original budget/agreement/contract that is required to complete the construction project.
Cost to Build: The amount of the lot (land) plus the contract price, plus any borrower paid and/or borrower prepaid items.
Course of Construction Insurance: This policy is in the form of an "all risk" policy with fire, extended overage, builder's risk, replacement cost, vandalism, and malicious mischief insurance coverage. The owner is names as the insured with insurable value equal to the replacement cost of the improvement or the loan amount, whichever is lower. Once the improvements are completed and the permanent mortgage begins, the course of construction policy is usually converted to a standard "all risk" policy.
Description of Materials: Also known as "specs." This is the document that describes the minimum grade and quality of materials to be used in building the house during the project term.
Direct Costs (Hard Costs): Construction costs that include labor and all building materials (such as lumber, cabinets, flooring, etc.) associated with the actual construction project. These are actual construction costs for work performed or materials supplied. Direct costs are often defined as "Hard Costs" and are associated with the labor and materials used for improvements to the property. These costs represent the materials and labor actually used in the construction of the home. These costs are disbursed based upon the percentage of completion at each draw request.
Draw Schedule: The draw schedule is used to detail the progressive payments to the builder/general contractor as the project is built. Draws are disbursed on progress completed and inspected at the job site. Only approved disbursements for "Soft Costs" are allowed prior to progress inspection.
Drywall: An interior wall finished with something other than plaster. Commonly referred to as a gypsum board finished wall. Also known as "sheetrock."
Exception: Variance from standard policy when the factors in a loan application do not exactly meet standard underwriting guidelines or standard Bank policy. In such a case, the Underwriter may review the application and decide if there are sufficient compensating factors to warrant making an exception.
Extension: A type of loan modification used to extend the terms of a closed-end construction loan.
Fixed-Price Contract: A contract to build a house that is based on firm bids and at a set price.
Foundation: A concrete pad located below the floor joists, the first floor or on the ground that supports the rest of the house.
Foundation Endorsement: A document certifying that the project is located within the property boundaries of the property and that there are no easements or encroachments present.
Framing: A part of the building process that consists of putting together the lumber skeleton of the house.
General Contractor: A person who is qualified by experience, training and/or education to perform in a specific industry (such as real estate construction) and typically is licensed by the city, county or state to enter into contracts to complete a project. A general contractor is responsible for completing the project but may hire others (subcontractors) to work on the project.
General Liability Insurance: An insurance policy covering construction-related damages to another party's property or another person. Builders must carry their own General Liability Policy as governed by applicable state law.
Initial Disbursement: The initial disbursement includes the pay-off of the lot or existing mortgage (if applicable) and related closing costs. The borrower must have an adequate down payment (equity) at the time of closing. Equity is defined as cash paid toward the lot, construction improvements (both direct and indirect), and at closing, if required.
Inspector: Typically, a persona knowledgeable in real estate construction, who periodically visits the project site to determine and report on the status of the work completed to date.
Interest-Only Period: The stage of the loan where the borrower is charged interest only on the outstanding balance. Borrowers do not pay any portion of the principal balance during the construction period.
Indirect Costs (Soft Costs): Costs such as permit fees, architectural plans, and insurance policies, associated with the construction of a home but not included in labor and materials. Indirect costs are often defined as "Soft Costs" and are paid upon receipt of invoices or proof of payment (canceled checks, invoices, etc.). Indirect costs such as builder overhead/supervision are disbursed based upon the percentage of completion at each draw request. Soft costs are costs associated with building the home, but not actual materials or work you can "see" on site. Typically, these are items related to architectural plans, building permits, soil reports, or similar prepaid costs.
Interest Reserve: A reserve account that holds an estimated interest amount that is due on the loan during the construction phase. The bank pays the interest due as necessary from this account. Any funds remaining in this account at the completion of construction are applied to the permanent loan as a principal reduction prior to reamortization.
Land Development Loan: A loan made to developers who are buying a section of land to develop into building sites, usually for resale to a builder who will build speculative housing. The developers typically put in rough roads, utilities, etc.
Lien: A claim on a property as security for a debt, judgment, mortgage, or taxes. A lien is a type of encumbrance. A specific lien is against certain property only, which a general lien is against all property owned by the debtor.
Line Item Budget (Cost Breakdown): A detailed listing of the actual costs of the construction project, including the cost of labor, all building materials, and any other costs associated with construction.
Lot Loan: A loan made to an individual or a builder to purchase a lot with the intention of building housing on it in the future.
Lot Value/Cost: If the borrower already owns the land, include a copy of the HUD-1 closing statement, regardless of when the lot was purchased. If the lot has been owned for more than 12 months, the bank typically uses the appraised value for the lot. If the lot has been owned for less than 12 months, the bank typically uses the purchase price to determine value.
Manufactured Housing: A manufactured home is built to HUD-code standards, after June 15, 1976, and must have HUD labels affixed. These are eligible for consumer loans and may be eligible for residential loan products. They must also meet additional criteria regarding the number of sections (two ore more), housing type siding and roofing, and foundation requirements and must have been converted to real property under applicable state law.
Marshall and Swift: Marshall and Swift is a third party vendor that provides a tabulation process for lenders to estimate residential construction costs. The project cost analysis program uses the ZIP code of the location, the building specifications and a quality rating for the structure. Once this information is entered, a cost project is generated for the project.
Mechanic's and Material-Men Lien: A claim on a borrower's property filed by a contractor, sub-contractor or material supplier for payment of work performed on the property. Depending on state law, these liens may have priority over the construction loan. In such a case, a valid Mechanic's Lien can result in a foreclosure, and the person filing the lien may obtain ownership of the property.
Modular Housing: A modular home is a prefabricated dwelling built in compliance with conventional state building codes and zoning requirements, consisting of three-dimensional sections, all exterior and interior elements of which have been completed in a factory. The unit is intended to be transported to a building site and joined together on a permanent foundation.
Modification: Any change of the loan terms or increase in the loan amount on a Construction loan.
Offsites/Offsite Costs: Improvements to be made to the general area of the property such as roads, water and sewer, sidewalks, etc. These improvements must be completed prior to the start of actual construction on the financed project.
One-Time Close Loan: A program providing construction and permanent financing in a single transaction. The loan requires only one application and one close with one et of closing costs. Interest-only payments are due during the construction phase. When construction is complete, the loan is converted to a permanent loan.
On-Site Costs: These are the direct site costs; the actual cost of construction covering all materials and labor associated with the building of the home.
Owner/Builder: A qualified builder/general contractor wishing to build his or her own personal residence.
Perc Test/Drainage: A test for a lot/land to determine if the soil will "perc" (have adequate drainage) or be acceptable for a septic system.
Permit/Building Permit: A document giving permission and agreement from local authorities and municipalities that the proposed project can be constructed on the assigned lot and meets all required specifications and rules that apply to the area.
Plat: A plan or map of a specific land area. Plat books are kept as public record and contain maps of land, showing the division of the land into streets, blocks and lots and indicating the measurements of the individual parcels, easements, etc.
Plans/Specifications: These documents consist of a legible set of architectural drawings (building plans) usually prepared by an architect and approved through a city or county plan check. They typically include a floor plan showing all dimensions, a foundation plan showing all dimensions, outside elevations of the building, electrical and plumbing details, as well as other details of the actual construction or improvements. They must be by all parties to acknowledge that they are the plans that will be used to construct the home.
Plot Plan: The document that shows us the lot dimensions and how the house will be placed on the lot with regard to easements, walkways, driveways, etc.
Prepaid Costs: Any fees or preliminary project costs paid out-of-pocket by the builder or borrower prior to the closing of a construction loan. These costs include local permits and fees, payments to architects and other design services, prepayment of taxes, etc.
Septic System Design Plot Plan: An approved, schematic design showing drain field lines and the septic tank or system in relation to the property lines of the house.
Single-Close Loan (All-in-One Loan): One loan that provides financing for both the construction and permanent financing of a new residence. Unlike the two-time close loan, there is only one et of fees, and the interest rate for the loan is established up-front.
Soft Costs: These are indirect site costs, including permit fees, engineering fees, architectural fees, and other costs associated with building the home but not directly part of the actual construction costs. Many times, the borrower has already paid some of these costs. To consider these paid items as "equity," the borrower must document the cost with a bill and canceled check or paid receipt.
Speculative Financing: A loan made to a builder to build a house for resale.
Stage Format: A type of disbursement method used by construction lenders that authorizes inspections and disbursements based upon preset points in the construction process. For example, a 5-Draw (Stage) Plan might have 20% disbursements (and related inspections) for the project.
Stick Built: A home built on-site from the ground up. Materials are delivered to the site and the builder/contract builds the home from preapproved plans and specifications and in accordance with a presigned construction contract between the borrower and the builder.
Subcontractor: A person experienced in a trade (such as plumbing or carpentry), who is hired by the owner or general contractor to complete work on a portion of a larger project. Licensing by the state or other government entity may be required.
Supervisory Contract: A contract to build a house based upon the builder inspecting but not taking responsibility for work performed or the cost of completion. This is not an acceptable form of contract.
Survey: A measurement of land, prepared by a licensed surveyor, showing a property's boundaries, elevations, improvements, and relationship to surrounding tracts.
Sweat Equity: Value added to a property through improvements made by the owner.
Take-Out Loan: The loan used to pay off (take out) the interim construction loan upon completion of the new home. Also known as "Permanent Financing."
Title Inspection Endorsement Fees: Fees that cover the cost of what the construction industry considers a "title date-down." At completion of each inspection and prior to disbursement of construction funds, the bank may contact a title company and ask for an endorsement that states their first lien position on the property.
Total Term: This time-frame is a combination of the interest-only period plus the principal and interest payment period of the Single-Close (All-in-One) Construction Loan. Typically, the total term is less than 360 months for a 30-year loan or 180 months for a 15-year loan.
Two-Time-Close Loan: A combination of two loans to finance the construction of a new home. The interest-only loan is for the construction period (normally 9-18 months), and typically has pricing tied to the Prime Rate plus a loan fee. The second amortized loan is the "Take-out" or "Permanent" loan to finance the completed home.
Worker's Compensation: A policy or endorsement covering the contractor, subcontractors and others who are working on the subject property. This policy is typically provided by the contractor, so the contractor should be names as the insured. It states that in cases in which worker's compensation insurance is not required or the borrower is acting as his or her own general contractor, a waiver must be executed.
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