OF YOUR CONSTRUCTION LOAN!
Accredited Mortgage can pre-approve your construction loan
before you work with your builder to design your new home. Take
advantage of our local decision-making for a fast, free loan
Accredited Mortgage – Specialty Lending Division Page 1
THE CONSTRUCTION LOAN
I. LOAN APPLICATION PROCESS
We will need your personal financial information, which is contained on a
Universal Residential Loan Application (1003) form. From this form, we verify:
A. Employment history for the past two years.
B. Residence for the past two years.
C. Credit history through a credit report and direct loan verifications.
D. Cash in the bank and other assets which may be liquidated such as
Stocks, Bonds, 401Ks, and Money Market Accounts, which can be used
for a downpayment if needed.
The complete loan approval and underwriting process will take 30 days or less.
II. CONSTRUCTION DOCUMENTS
Before final approval of your loan, we will order an appraisal of the home. To
order the appraisal we require these documents:
A. One full set of Construction Plans.
B. A completed Description of Materials signed by Contractor and Applicant.
C. Signed Contract between Builder and Applicant. (A licensed general
contractor is required.)
D. A completed and signed Sworn Construction Statement.
E. Purchase Agreement for land or Warranty Deed if land owned previously.
If purchased within the last 12 months, verification of the purchase price is
III. QUALIFYING FOR THE LOAN
To qualify for the loan, we use the following ratios:
A. The house payment, or PITI (Principal, Interest, Real Estate Taxes &
Insurance), should not exceed 28% of your gross monthly income.
B. PITI plus all other obligations (Loan Payments, Revolving Charge Account
Payments, Etc.) should not exceed 36% of the borrowers’ gross income.
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IV. FIXED CONSTRUCTION INTEREST RATE
The interest rate during the twelve-month construction period is at a fixed rate.
IV. PERMANENT FINANCING
The permanent financing (end loan) can be a fixed rate or adjustable rate loan. The
construction loan can be modified into a fixed rate loan or an adjustable rate loan.
The closing costs paid at your construction loan closing will not need to be paid
again for permanent financing.
V. LOAN TERMS
A. The maximum loan term is 30 years.
B. The construction period is 12 months. During the construction period, the
borrower pays interest only payments on the mortgage proceeds as the funds
VI. DOWNPAYMENT REQUIREMENTS
The downpayment can be in the form of cash or equity. A cash downpayment is
paid at closing. Minimum downpayment requirements are:
A. 20% of construction cost or appraised value (whichever is lower) for a loan
without Mortgage Insurance Coverage.
B. 5% of construction cost or appraised value (whichever is lower) for a loan with
Mortgage Insurance Coverage. If mortgage insurance is required, it means an
additional monthly cost for premiums.
There are three types of equity in addition to cash that can be used for a
construction loan to meet downpayment requirements.
A. Land - if you have owned for more than one year, the current value can be used.
If you have owned for less than one year, the purchase price is used.
B. Improvements - Examples are: Well, Septic System, Driveway, or Garage which
were previously built on the subject property.
C. Sweat Equity - value received for labor performed by borrower. This can be
very limited unless the borrower is qualified to do the work.
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VIII. CLOSING COSTS
Closing Costs are paid to cover the costs of such things as the Appraisal, Credit
Report, Title Insurance, Closing Fees, County and State Taxes, etc.
A. Closing Costs are disclosed at the time of application using the "Good Faith
Estimate of Settlement Costs".
B. When the appraisal is ordered, the appraisal fee is collected.
C. All other Closing Costs are paid at closing.
IX. CLOSING THE LOAN
The culmination of the loan process is the loan closing. Our closings are held at a
title company. The closing will be held when the following items are completed.
A. The loan is approved.
B. The Title Insurance Requirements are met.
C. Evidence of builder's risk insurance on the property is received.
At the closing you will be required to pay to the title company the balance of the
funds required for the down-payment and closing costs.
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DISBURSING THE CONSTRUCTION LOAN
After closing the remaining loan proceeds and down-payment funds are held in a
construction account at our investor / lending partner. All disbursements to pay the
contractor are made from this account.
Before any disbursements, or "draws", can be made, we require a plat sketch. The
plat sketch will show that the house is located within the boundary lines of the lot.
Once the footings and foundation are in place, the plat sketch should be ordered
through the title company that closed your loan or your mortgage originator.
Preparation of the plat sketch may take up to a week, so any delay in ordering it
could delay the funding of the first draw.
When requesting a draw on the construction account, the contractor should provide
an invoice to the borrower showing the amount requested. The invoice must be
signed by the borrower to acknowledge the amount is acceptable.
The title company that closed your loan will make the disbursements from the
construction account. The signed invoice should be submitted to the title company.
They will notify us of the draw request.
We will contact the appraiser who did the appraisal of the property and instruct
him to inspect the construction to date. The appraiser will provide us with the
percentage of completion based upon a standard inspection form used by us.
This percentage is applied to the total cost of construction to determine the
progress of the contractor and whether the invoiced amount is consistent with the
work completed. If the inspection indicates that the completion percentage is
less than the amount requested, the amount of the draw may be reduced by us
or the title company. The percentage complete will include only those materials
which have been incorporated into the house and will not include any materials
stored at the site.
The inspection will normally take two or three days and the contractor should
allow for this when requesting a payment. The cost of the inspection is paid by
the borrower so it is best to limit the number of draws to keep the cost of
inspections to a minimum.
Normally three to five draws are expected during the construction of the house.
For each draw after the sixth we require a $25 fee to be submitted with the draw.
After the inspection report is received from the appraiser, the title company will
pay the contractor and subcontractors directly. We will send you a statement
indicating the amount paid from the construction account and the balance
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Minnesota law provides for certain lien rights for all contractors, subcontractors
and suppliers who provide labor and materials for the construction of a house.
Any contractor, subcontractor or supplier who does not receive full payment for
their services may file a mechanic's lien against the property. This lien creates
an interest in the property which could result in a forced sale of the property. A
lien waiver signed by the contractor, subcontractor or supplier when they receive
payments for services is required to insure that liens will not be filed against the
property. When the title company makes payments from the construction
account they will provide a lien waiver for each payment. All lien waivers must
be returned to them before any further payments can be made from the
In addition, the construction of the house can not begin until the mortgage
has been filed and a photograph has been taken of the vacant land. If
construction begins prior to filing the mortgage and the photograph of the
vacant land, the loan closing may be delayed or cancelled.
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MODIFYING THE CONSTRUCTION LOAN
TO A FIXED RATE END LOAN
The Construction Loan may be modified to a fixed rate loan as long as certain
conditions are met.
A. The loan term is either 15 or 30 years.
B. Modifying to the permanent end loan cannot occur until the house is
complete and all funds are disbursed from the construction account. A
well and water evaluation as well as a septic certification will be required
on those properties with a new or existing well and septic system.
C. Modifying of the permanent end loan cannot occur more than 12 months
after closing of the construction loan.
D. The interest rate and discount points are normally locked 60 days prior to
closing. A longer lock is available but there may be additional fees for
longer lock requests.
E. An escrow account for taxes and insurance is normally required. You will
need to provide sufficient funds to fund the escrows at modification.
F. The interest owing on the construction loan and, if applicable, interest
through the first of the following month on the permanent loan will be due
The process is similar for those who prefer an Adjustable Rate permanent end loan,
such as a 5/1 ARM.
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