Wildfire Roadmap to Recovery:
Meeting #6, January 24, 2008
Rancho Bernardo Community Presbyterian Church
- Private Construction Loan Process
- Working with Lender to Release
Availability of R2R Powerpoint
Fire Recovery Ministry
Road-to-Recovery Educational Series
Beginning Feb 1, 2008
The information provided in this program is intended for
general educational purposes only. It should not be
construed as legal advice.
The speakers at today’s program are volunteering
their time as educators.
Neither United Policyholders nor the Rancho Bernardo
Community Presbyterian Church endorse or warrant the
message or services of any volunteer speakers.
Financing issues relating to rebuilding
Working with your lender to
release insurance proceeds
An Overview of the Private
Construction Loan Process
Loan approval and loan closing
Initial draw disbursed, construction begins
Construction completed, final draw approved
At last…welcome (back) home
With credit access tightening in response to the subprime mortgage
crisis, the SBA's disaster loan program, offering 30-year, fixed
interest rates well below market levels, could prove critical to
recovery for many wildfire victims.
To receive a disaster loan, applicants must have an acceptable
credit history and a dependable stream of income large enough to
cover monthly payments, which begin five months after the financing
is delivered. The loan money is delivered in increments based on
the progress of construction.
The loans may be ideal for fire survivors who don't have savings to
tap for repairs or would take a big tax hit for liquidating stock
If you qualify for an SBA loan:
Homeowners who qualify for the lending
program can borrow up to:
$200,000 at a fixed rate of 2.94 percent
to repair or replace their homes
$40,000 to replace personal property,
such as appliances and furniture.
When working with your lender to release
insurance proceeds…Know going in:
Your mortgage documents are set up to protect
the mortgage company from you taking your
insurance rebuild money and disappearing
Your lender, like your insurer, must act in good
faith when dealing with you
Your lender may pay 2% interest on insurance
proceeds they are holding but only if you push
them to do so
Periodic payments as phases
are satisfactorily completed:
All funds for construction should be
held in a fund control account and be
dispersed by a third party throughout
construction to the general contractor.
Make sure your Architect and General
Contractor are fully licensed in the
State of California.
Check license status with the CA.
Contractor’s State Licensing Board at:
www.cslb.ca.gov or call 1-800-321-CSLB
Our heartfelt thanks to:
The Rancho Bernardo Community
All our UP Mentors and Sponsors
The speakers at tonight’s meeting
Overview of Private
Construction Loan Specialist
Served Cedar Fire Survivors
You have unique needs
Every loan represents a unique borrower
with a unique situation
- Your situation is very unique and stressful
Look for loan officer and mortgage company
expert in construction loans
Pitfalls to avoid
Look for best service, lowest fees, interest, discounts
How can you tell?
Look for Lender and Agent sensitive to your rebuilding
under duress following the fires
What is a Construction-to-
A Construction-to-Permanent Loan is two loans in one.
Unlike buying an existing home, financing the building of
a new home includes a construction phase, the period of
time your new home is being built.
Once construction is complete, a permanent mortgage is
A Construction-to-Permanent Loan includes both the
construction phase and the permanent mortgage.
This is why it’s called a Construction-to-Permanent Loan.
How does the construction loan
The Construction-to-Permanent Loan process is similar
to the process of a standard home purchase or refinance
Unlike a purchase transaction for an existing home, a
Construction-to-Permanent Loan involves determining
the value of a home that is not yet constructed.
In determining the future value of your new home, we
request information on the planned improvements and
Overview of the Process
COE – Approval
Glossary of Terms
- Handout at Entrance
Fixed Price Contract
Cost Plus Contract
Description of Materials
By Owner Items
What is “one-time close” and how does it
save time and money?
One-time close means with one construction
loan application, qualification and closing, you
get all the financing you need to build your home
and obtain a permanent mortgage when
construction is complete.
Best of all, you only pay one set of closing costs.
There are no payments during the construction
phase so you can focus on your new home
What is meant by “no-payment”
As part of your Construction-to-Permanent
Loan budget, we establish an account to
pay the estimated interest costs during the
construction of your home.
This way you make no monthly payments
during construction unless your interest
reserve account is depleted before
completion of your project.
What will home building cost?
Start by guesstimating these costs:
+ Buildable Site (You already have it)
+ Home Design
+ Construction Cost
+ Cost of Financing
= TOTAL COST TO BUILD YOUR CUSTOM HOME
Once I get started, how do I
access my funds?
Unlike a standard purchase mortgage, a
Construction Loan is disbursed in the form
of payments (or "draws") as each phase of
construction is completed.
What forms will be provided by
Typically, a lender will provide you with a
variety of forms (although this may differ
from lender to lender):
``application checklist'' form
``residential loan application'' form
``description of materials'' form
``construction cost breakdown'' form
What information will be required
Employer's address and phone number, length
of time you've worked there,and your current
position and monthly income; OR
(if self-employed) profit and loss statements, tax
returns and balance sheets for the past two
years, as well as the current period.
Your personal asset and liability backup
information, including account numbers,
balances, and addresses and phone numbers of
your financial institutions.
What information will be required
from you? (con’t)
Details of lot acquisition such as deed or a copy
of the earnest money agreement. Also, you
must provide notification of any covenants which
apply such as approval by an architectural
Full documentation for your home building
A complete set of working drawings
A description of materials
A construction cost breakdown
Work with your Contractor to
Provide Needed Documents
Scrutinize the line items and make sure that
Review line items carefully
Build in some breadth in line categories to
allow for options on construction items
- Example: “Exterior Siding” allows for stucco, brick, rock, HardieBoard
A line item of “stucco” limits payment to stucco.
Discounts that may be offered by
Following 2003 Cedar Fire
Loan with no points, closing costs, etc
Discount on Title Insurance
Following 2007 Firestorm
40 – 50% discount on Title Insurance
Every situation is unique
Work with an experienced lender/loan
officer to determine the best option for you
There are many options available
Gather all your information before making
a commitment to anyone in the process
Questions and Answers
A Second Perspective on
the Private Construction
Construction Lending Officer/Loan Officer
Working With Your
Lender To Release
Ken S Klein
2003 Cedar Fire Survivor
United Policyholders Disaster Recovery Mentor
Checks Made out from Insurance
Company to Lender and You
If you have a mortgage, then some or all of the
checks from your insurance company will be
made payable jointly to BOTH you and your
mortgage company. The mortgage company
will end up with the money in its account.
This will mean that at least at first, your
mortgage company, not you, will control the
The goal of this presentation is to explain
to you how this happens, and to give you
strategies to try to get control of the most
money as soon as possible.
Here is the really big overview point:
You have some, limited rights, but to get
the most money as quickly as possible will
take knowledge and persistence.
Why does this happen?
Your mortgage documents protect the mortgage
company preventing you from taking your
insurance rebuild money and disappearing.
In other words, the property and the house are
the collateral for the loan; and so if you cashed
the checks and did not rebuild, then the
mortgage company would have a problem.
These documents set up a system to prevent
you from doing that.
The standard California mortgage (and so,
probably, your mortgage), says:
5. Property Insurance. Borrower shall
keep the improvements now existing or
hereafter erected on the Property insured
When you borrowed money, you agreed
that one way the mortgage company
would be protected would be that the
mortgage company would be co-insured,
right along with you, for any harm to your
What does this mean?
It means is that unless and until you get
your mortgage company to agree to
something different (in writing), every
Coverage A check you get, and maybe
some of your other coverage checks, will
say something like: “Pay to the order of
Jane Doe and Jane Doe’s Mortgage
You then will be required to endorse the
check first, and the mortgage company will
deposit the money into its own account,
and only will release the money to you
Big Question 1 (of 5): If the checks are more
than the mortgage, does the Lender get to keep more
money than I owe them on the mortgage?
It should not. Also in paragraph 5 from the standard
California mortgage, you only agree,
“… to generally assign rights to insurance proceeds to
the holder of the Note up to the amount of the
outstanding loan balance.”
Indeed, for this reason, some mortgage companies also
have a written policy saying the company only holds
money up to the amount of the outstanding loan balance.
Why does the company need such a policy if it already is
part of the mortgage?
The mortgage company has a special department (the
“Loss Department”) that handles control of rebuild
money after you have had a house fire. This work often
is actually outsourced to an independent company. In
either circumstance, the people you deal with may not
know or try to know what the mortgage actually says.
LESSON: Knowledge is power. Read and understand
your documents, and use that knowledge to your
Be diligent, persistent, proactive
The Loss Department is not user-friendly.
Do not be surprised if:
the “Loss Department” will not, on its own, refund to
you the extra money until you ask for it
or if it is difficult to talk to a live human being at the
Loss Department at all
or if you get form responses to letters rather than
answer your questions.
Big Question 2: Will the mortgage co. be a
co-insured on only the Coverage A checks?
Perhaps. Paragraph 5 also says:
5. Property Insurance. …. If Borrower obtains
any form of insurance coverage, not otherwise
required by Lender, for damage to, or
destruction of, the Property, such policy shall
include a standard mortgage clause and shall
name Lender as mortgagee and/or as an
additional loss payee ….
A good rule of thumb is to assume that the
mortgage company could claim a right to
be treated as a co-insured on insurance
coverage for those things that are or must
stay on the property when the house is
sold -- plants, grass, the house, the fence,
the driveway, etc.
But insurance companies often only co-write
the Coverage A checks, and Loss
Departments often do not challenge that.
Big Question 3: Do I get interest on the
money while the mortgage company holds it?
Probably, but usually not without a fight (at least
a little one). That same paragraph 5 in the
standard California mortgage also says:
“Unless an agreement is made in writing or
Applicable Law requires interest to be paid on
such insurance proceeds, Lender shall not be
required to pay Borrower any interest or
earnings on such proceeds.”
California arguably does have an “applicable law.”
The California Civil Code says:
“§2954.8. Payment of Interest to Borrower.
(a) Every financial institution that makes loans upon the security of
real property containing only a one-to four-family residence and
located in this state or purchases obligations secured by such
property and that receives money in advance for payment of taxes
and assessments on the property, for insurance, or for other
purposes relating to the property, shall pay interest on the amount
so held to the borrower.
The interest on such amounts shall be at the rate of at least 2
percent simple interest per annum.
Such interest shall be credited to the borrower's account annually or
upon termination of such account, whichever is earlier.”
Many folks successfully argue to their mortgage
company that insurance proceeds checks to
fund a rebuild are “money in advance for
payment … for … purposes relating to the
property.” Simply put, they get 2% interest.
CAUTION: To my knowledge, no one has ever
fought about it all the way through to court, and
so there is no “final” answer.
There is another, different argument you
could try -- the leading book on California
real estate law – Miller and Starr – argues
that there is a California court decision
suggesting that if a mortgage company
holds the money in an interest bearing
account, then the interest is your money
(if you want to look this up, it is section 10:61 of the treatise titled
California Real Estate by Miller & Starr).
So here is another approach you
Ask your mortgage company for a copy of the
deposit slip reflecting the account number the
company deposited the funds into, and the
account documents for that account verifying
that funds held there neither bore interest nor
were invested. I did this in 2003, and my
mortgage company just gave in and transferred
to me all of the money.
LESSON: Sometimes it matters more that you are a
pain in the neck than that the statute applies.
Big Question 4: How quick do I
get the money?
Not as quick as you would hope for. Once
again, let us visit paragraph 5 of the standard
California mortgage, which says,
“During such repair and restoration period,
Lender shall have the right to hold such
insurance proceeds …. Lender may disburse
proceeds for the repairs and restoration in a
single payment or, in a series of progress
payments as the work is completed. ”
But … it is a “business reality” that a builder is
not going to do all the work before getting paid
any of the money.
It also is a “business reality,” however, that most
builders are used to working in the environment
where they are not paid entirely in advance, but
rather get partial, periodic payments with at least
some amount withheld until completion.
Your mortgage company understands
Because your mortgage requires you to rebuild or
restore your property to good condition after a fire, the
mortgage company will not hold all the money to the
end, because that could be a “breach [by the mortgage
company] of the implied covenant of good faith and fair
This is lawyer-speak for the company has to play fair
to avoid getting sued. So you will get the money in
Typical Progress Payments
A typical progress payment policy is to
1/3 of the held proceeds up front
1/3 upon inspection verifying 50% completion
1/3 verifying 100% completion
Big Question 5 (the last one): Can the
mortgage company just use the money to pay off
the mortgage, even if I do not want them to?
The short answer: NO. That would also
be a “bad faith” problem.
So what is the bottom line; what
should I do?
Read your documents.
Get in touch with your mortgage company, both
by telephone and by mail.
Stay in touch. Be persistent and patient, and be
polite but firm.
Keep a diary of the name and contact number
(& the name of their superior and that person’s
contact number) of every person you talk to.
Write detailed letters that include a full recitation
of prior communications.
When dealing with your mortgage company,
consider emphasizing at least one or more
of the following points:
Without the money, you cannot get their collateral rebuilt.
Treating you well is good public relations for them, and in this
“sub-prime crisis” environment they need good PR.
You likely are not their only borrower who lost a home in this
community, and if there is a trial to determine if they are treating
you correctly, then (1) it will be on behalf of ALL of their
borrowers who lost homes in the wildfire, and (2) every juror will
be either (a) someone who lost their home, (b) someone who
knows someone who lost their home, or (c) someone who thinks
“Oh my goodness I could have lost my home.”
When dealing with your mortgage company,
consider emphasizing at least one or more of the
The mortgage company has no reason to be “over-
collateralized.” Your raw land is part of the collateral,
and has value of its own. Thus, to some extent, giving
you money “earlier” than the mortgage company has to
does not leave the mortgage company completely
exposed were you to take the money and disappear.
Ask them to document what happens to the money while
they have it (does it generate interest, and if not, is it
invested) – the answer could be uncomfortable for them,
and if so, that is good for you.
Summary : Q & A
CAUTION: This has been a discussion of
how the world works under standard
California documents. You may not have
standard California documents.
Read your documents.
Break Out Sessions
for Fire Survivors
Open to 9:30 pm: Firm Stop time
State Farm : Dormer West
Farmers : Skylight West
Allstate : Upper Courtside East
Other Companies: Sanctuary