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                A Consumer's Guide to
                Construction Financing
Frequently Asked Questions About
Construction Loans 7
This guide is a valuable resource for anyone planning to build a custom home. It provides in-depth
information on financing options, construction costs and a timeline to help you plan your project from start to

What Home Construction Loan Products Do We Offer?
Construction-to-Permanent Loan
The Construction-to-Permanent Loan is a one-time close loan designed to build or rehabilitate a primary
residence or second home and obtain permanent financing. One-time close means one loan–start to finish.
You sign one set of loan documents that covers both the interim construction phase and the permanent loan
phase. This eliminates the need for multiple loans to get you into your new home. With this single loan, you
can purchase the land for your home and complete the construction. When the construction has been
completed, the loan automatically converts to a permanent mortgage loan without another application or
additional closing fees. You may choose from several loan products (Fixed and Adjustable Rate Mortgage
(ARM)) and rate lock options that offer a variety of features. The construction period may vary in length from
6, 9 or 12 months. Additionally, construction periods of 15 and 18 months are also available.

Lot /Land Loan
This is the perfect loan program to finance the purchase of a residential lot for future construction of your
dream home. The convenient balloon maturity option allows you 2 or 5 years to design your home and
choose a building professional. Program options include a Fixed Rate 30/2 and ARM 30/5. Best of all, you
can choose The Bank's Construction-to-Permanent Loan when you're ready to build.

Remodeler, Second Mortgage Loan
Want to make major improvements to your existing home? Need a new kitchen, bigger bathroom or family
room addition? This unique second mortgage calculates the loan amount by using the future value of the
planned improvements. And we give you immediate access to the construction funds at loan closing. This
program allows the flexibility of a 30-year mortgage with a 15-year balloon or a fully amortizing 15-year

Bridge Loan Second Mortgage
Want to use the equity in your existing home as the down payment on your Construction-to-Permanent
Loan? Our Bridge Loan program allows you to take advantage of the equity in your current owner-occupied
residence (which is intended to be sold) to use for the down payment requirements on a Construction-to-
Permanent Loan.

How Does The Construction Loan Process Work?
The Construction-to-Permanent Loan process is very similar to the process of a standard purchase or
refinance transaction. But, 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. To assist the appraiser and the
lender in determining the future value of the home, information must be provided on the planned
improvements, what materials will be used and the total costs to complete the construction. Additionally,
The Bank must evaluate the building professional who will oversee the work to ensure that he or she has the

This publication is designed to provide general information, not legal or technical advice. If legal advice or other expert advice is required, the services of a
competent professional should be sought. Any loan terms referenced in this publication are subject to change without notice.
experience and expertise to complete the proposed construction. For a Construction-to-Permanent Loan,
the following documentation is generally required in addition to standard credit documentation; however, a
list of documentation to fit your specific needs will be provided to you.

• Final Plans and Specifications. These consist of a legible set of architectural drawings (building plans)
prepared by an architect and approved through cityor 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 planned construction.
• Construction Contract. This is the agreement between the building professional and you that details the
planned construction project and the agreed-upon cost.
• Detailed Line Item Cost Breakdown or Budget.
This is generally prepared by the building professional and should include the hard costs (direct costs) and
the soft costs (indirect costs).
• Property Profile or Description of Materials.
This information describes the materials to be used in the construction of the home. For example, wood
shingle roof or lightweight tile; redwood siding or cedar shingle.
• Completed Construction Loan Budget Worksheet. This form is used to bring all the costs together,
along with all the items that you have prepaid. By using this form, you are able to determine the maximum
loan amount, the amount of equity required by you and the amount of funds to be disbursed from the loan at
closing. Your Construction Loan Specialist can assist you with the budget.
• Builder Statement. This form ensures that the building professional is experienced, has a proven track
record and will be able to perform under the terms of the contract.
• General Contractor License. A copy of the building professional’s license (not required in all states or
with an approved consultant) should also be included with the Builder Statement.

What Makes Up The Construction Project Costs?
There are a number of costs that go into building a new home. A description of each is contained below. •
Soft costs. Permit fees, engineering fees, architectural fees and other costs associated with building the
home but are not directly a part of the actual construction costs. Many times, you may have already paid
some of these costs upfront. If so, these paid items may be considered as "equity", if you can document the
cost with a bill and a canceled check or a paid receipt.
• Hard costs. The actual cost of construction covering all materials and labor associated with the building of
the home. Typically, you will enter into a contract with a building professional to build the property. Like a
purchase contract for an existing home, this contract sets forth the work to be done and the costs associated
with that work.
• Closing Costs. These are costs associated with the closing of the loan, such as title costs, loan fees,
discount fees, inspection fees and appraisals.
• Contingency Reserve. A reserve account to cover unforeseen cost overruns in the construction of the
home. A required 5% of the hard costs will be established in a Contingency Account (your building
professional may hold a reserve other than what The Bank requires.)
• Interest Reserve. At loan closing, an account is established to pay the estimated interest costs during the
construction of the home. So you do not have to make out-of-pocket payments during construction. The
formula for the interest reserve estimate is provided in the following example: (Loan Amount x .60) x Interest
Rate ÷ 12 = Monthly Interest
Monthly Interest x Construction Term
Loan Amount $233,000 x (60%) x .60
$139,800 x (Interest Rate) x 6.0% = Annual interest $8,388 ÷ (12) = Monthly Estimated Interest $699 x
(Construction Term) x 9 = Interest Reserve $6,291 The previous example provides for an Interest Reserve
account of $6,291 for a loan amount of $233,000 with a construction term of 9 months.
• Land value/house cost. If the property was purchased within the past 12 months, the purchase price of
the land will be used in determining the site value. If the property has been owned for more than 12 months
but less than five years, The Bank will generally use the purchase price to determine the site value.
However, if the estimated site value is strongly supported by recent and proximate comparable sales, The
Bank will consider the appraiser's estimate of value subject to underwriter review. If the property has been
owned for more than five years, the appraiser's estimate of the site value will be used. A copy of the HUD-1
for the purchase of the land must be provided.
• Loan-to-Cost (LTC). The maximum loan amount is based on total project costs, and is determined by
using the maximum LTC. The following is an example of the LTC calculation using the same loan
information in the Interest Reserve Formula previously provided.
Land value/ house cost: $40,000 + Total cost of construction: $180,000 = $220,000
This publication is designed to provide general information, not legal or technical advice. If legal advice or other expert advice is required, the services of a
competent professional should be sought. Any loan terms referenced in this publication are subject to change without notice.
+ Total closing costs $10,000 = $230,000 + Interest Reserve $6,291 = $236,291
+ Contingency Reserve $9,000 = $245,291 x Maximum LTC 95%
Loan Amount = $233,000
How Do I Start The Loan Process?
You may get started now either online at http://hcl.Thebank.com or by calling to speak with an The Bank
construction loan specialist, toll free (800) HCL-LOAN (425-5626).
Still Have Questions?
Call toll free (800) HCL-LOAN (425-5626) to speak with a construction loan specialist. We're here to help
you every step of the way.
e I: Assembling your dream team (approximately 4 months)
MONTHS 1 - 4
• Putting Your Dream On Paper
You have several options. You may purchase home plans from home plan websites or specialty magazines.
Or you may select an architect to design your home. Finding an architect may be as simple as asking
friends, family and others in your community for recommendations. Be sure to interview several architects
before making your final selection. Keep in mind that your architect is a key part of your dream home team
and will be involved in the construction process from start to finish. You may also want to collaborate with an
interior designer who can work with the architect on location of windows and doors, appropriate room size
and lighting plans.

• Building Your Dream
You'll want an experienced building professional with a history of delivering a high quality finished product
within budget and in a prescribed period of time. Again, word of mouth from friends, family and others is one
way to get in touch with the builder community. Be sure to check references. Once you've narrowed down
your list, you may want to consider asking for bids.

• Financing Your Dream
Another important member of your dream team is your construction lender. Your lender should be able to
answer all of your questions about financing options and recommend the loan program that best meets your
needs. Your construction lender also determines the loan amount for which you qualify.
• Loan closing
Your construction term begins on the date that you sign your loan documents. You can request a startup
draw of 5% of the current construction amount. Draw requests conveniently may be made online.
• Groundbreaking
• Foundation
MONTHS 2 - 4
• Framing
Building your dream home begins several months before you break ground. Understanding each step of the
process, from assembling your dream home team to planning your house warming, and how long it may
take, is crucial to keeping things moving smoothly without any surprises along the way. It all begins with
knowing your A, B, C's. You need an Architect to design your home, a Building Professional to construct it,
and a Construction lender to help finance it. You may also want to use a realtor to find a finished lot if you do
not already have one. You can assemble your team in any order you choose. But keep in mind, that each
plays an integral role in the process and will work together to help make your vision a reality. This
Construction Timeline will help you plan for your project. It is based on a 12-month construction phase.
However, all projects are not the same. Typically, the construction phase ranges from 6 to 12 months.
Larger projects may take longer.
Phase II: Construction Phase (base
Construction Timeline
• Roofing
• Rough plumbing
• Electrical
This publication is designed to provide general information, not legal or technical advice. If legal advice or other expert advice is required, the services of a
competent professional should be sought. Any loan terms referenced in this publication are subject to change without notice.
• Other mechanical work
MONTHS 7 - 10
• Drywall and insulation
• Flooring
• Stairs
• Cabinets
• Painting of trim, walls
and ceilings
• Final mechanical work
• Final sanding
• Sealing
• Carpeting
• Closet shelving
• Final inspection
• Final close
• Releasing the contractor
• Final Draw Request
• Construction loan rolls
to permanent loan
• Plan party to show off
your new dream home!
new dream home!
American Society of Interior Designers
is an association of interior designers and a resource to
you on how to find and choose a designer in your area.
ASID members in your area may be found at
American Institute of
Architects (AIA)
is a professional association of licensed
architects, with a strong commitment to
educating and serving the general public.
AIA members in your area may be found at
ed on a 12-month period)
National Association of Home Builders (NAHB)
is an association representing more than 205,000 residential
home building and remodeling industry members. Known as
"the voice of the housing industry," NAHB is an excellent source
of information for consumers interested in building a custom
home. Visit their website at www.nahb.org

How Do I Get My Funds From My Construction Loan?
Disbursements are made on a reimbursement basis. You or your building professional are required to
advance funds into the project. Disbursements will occur over a period of time based upon the percentage of
work completed on the home each month, as determined by The Bank. Prior to loan closing, you will
designate a construction bank account at a Federal or State chartered financial institution. Your
disbursement funds will be wired directly to this account. At your request, The will set up an The Value
Checking Account at no cost to you. You may submit draw requests directly to The Bank or if you prefer,
your building professional may submit the draw request with your authorization. As an added convenience,

This publication is designed to provide general information, not legal or technical advice. If legal advice or other expert advice is required, the services of a
competent professional should be sought. Any loan terms referenced in this publication are subject to change without notice.
draw requests may be made online, faxed or e-mailed. Upon receipt, The Bank will request a progress
inspection and an update to the title coverage. Assuming that the inspector, title company, and/or The
raises no issues or concerns, The will wire the monies into the established account.
• Initial Disbursement. The initial disbursement at closing includes: the payoff of the lot or existing
mortgage (if applicable), and related closing costs, less your required equity. The initial disbursement will not
exceed the amount allocated in the Loan Budget Worksheet for closing costs and/or lot payoff. Any
additional costs must be paid by you at closing. You must have an adequate down payment (equity) at the
time of closing. Equity is defined as cash paid towards the lot, construction improvements (both hard and
soft) and cash paid at closing, if required. If you own the lot free and clear, you cannot obtain "cash back"
that has been applied to the lot purchase until the project is 100% complete.
• Hard Costs (direct costs). The costs for material and labor are disbursed based upon the percentage of
completion at each draw. Payment of deposits for the following items are allowed, up to 50% of the line item,
when accompanied by an invoice:
• Windows
• Countertops
• Doors
• Cabinets/Appliances
• Flooring
• Custom Lighting
• Soft Costs (in-direct costs). The Bank will pay the soft costs on a monthly basis upon receipt of a draw
request and invoices or proof of payment. Soft costs, such as builder overhead/supervision, will be
disbursed based upon the percentage of project completion at each draw.
What Insurance Is Required With A Construction Loan?
Construction-to-Permanent Loan
During the construction of your home, you have additional risk. Therefore, insurance requirements on a
construction loan are more complex than a standard loan. There are three principal requirements for
insurance on a Construction-to-Permanent Loan.
• Course of Construction Casualty Insurance.
This policy is in the form of an "all risk" policy with fire, extended coverage, builder's risk, replacement cost,
vandalism and malicious mischief insurance coverage. The owner is named as insured with the insurable
value equal to the replacement cost of the improvements or the loan amount, whichever is lower. The lender
is named as the mortgagee under the policy. Once the improvements are completed and the permanent
loan phase begins, the course of construction policy is usually converted to a standard "all risk"
homeowner's policy.
• Workers' Compensation Insurance. This endorsement covers the building professional, subcontractor or
others who will be working on the subject property. The building professional typically provides this policy,
thus the building professional should be named as the insured. In states where Workers' Compensation
Insurance is not required or you are acting as your own building professional, a waiver is required.
• General Liability Insurance. This is a comprehensive general policy or included as a broad form liability
endorsement. You or your building professional can provide this. If you provide the insurance, a minimum
amount of $300,000 for each occurrence is required, extended to both property and personal injury. If your
building professional is providing the insurance, a comprehensive general policy of at least $1,000,000, or a
policy including a broad form liability endorsement is required.
Remodeler, Second Mortgage Loan
A standard homeowner's policy that includes Workers' Compensation, General Liability Insurance and
Personal Liability Insurance is required.
Flood Insurance
Flood insurance is mandatory on all loans if any of the subject property improvements lie in a specified
Flood Zone. Flood insurance is not required if the subject property is in Flood Zone X, or if a letter is
obtained from FEMA stating that the applicable maps have been amended such that the subject property no
longer lies in a flood zone.
Lot Loans
Insurance is not required on lot loans. You are encouraged to review your current homeowner's policy
forliability coverage that can be extended to cover the lot being purchased.
Frequently Asked Questions About Construction Loans
When does the construction loan term begin?
The construction term begins on the date you sign the loan documents.
How does The Bank know where to wire
the funds?
At loan closing, you sign a Construction Disbursement Account Information form that identifies the bank
account that was opened for the purpose of receiving wired funds. For fast access to the construction funds,
we advise opening an The Bank Value Checking Account. We'll help you set up the checking account, and
This publication is designed to provide general information, not legal or technical advice. If legal advice or other expert advice is required, the services of a
competent professional should be sought. Any loan terms referenced in this publication are subject to change without notice.
wire the disbursement funds directly to it. Should there be a change to the checking account, you must notify
The Bank Home Construction Lending immediately in writing.
How much can I get for start-up costs?
At your request, The Bank will disburse 5% of the current construction amount to help get the project
started. We will also disburse funds for upfront expenses such as permits and utility connections upon
verification of payment with paid receipts.
Can I get reimbursed for pre-paid items?
You can be reimbursed for items that have been pre-paid that are not in the budget as equity items. Pre-
paid items that are reflected on the budget and used as equity contribution are not reimbursable.
What are hard costs?
Hard costs are direct costs associated with the labor and materials used for the actual construction of the
home. Hard costs are also known as "direct costs", "board and nails", "on-site costs" or "hard cost
improvements." Hard costs are disbursed based on an inspected percentage of the overall completion of the
project rather than the items allocated in the budget.
What are soft costs?
Soft costs are indirect or "off-site" costs not directly related to labor or materials for construction.
Examples of soft costs include building permits and architectural fees. Soft costs are disbursed monthly on
an "as needed" basis, with invoices, receipts, canceled checks or other evidence of payment. However, soft
costs such as builder overhead/supervision are disbursed in proportion to the percentage of completion
of the home.
What are deposits?
Vendors for items like cabinets, light fixtures, windows, appliances or any other specialty improvement that
requires custom craftsmanship usually require deposits. The Bank will release up to 50% of the total amount
budgeted in the specific line item for the deposits.
How does the disbursement process work?
Disbursements on a construction loan are designed to reimburse you as the construction of the home
progresses. The Bank will disburse construction proceeds based on the amount of work that has been
completed on the project. For example, if the construction budget is $100,000 and the project is 10%
complete (based on the inspector's report), The Bank will disburse up to $10,000 on the project. This
disbursement would be in addition to any advances or deposits you may be entitled to receive.
Disbursements for soft or hard cost expenses must be verified by an inspection.
Is there a set schedule for requesting draws?
There is no set schedule. As much as possible, draw requests should be made for reasonable amounts
andspaced appropriately based on construction progress.
Who does the inspections?
Inspections are completed by a qualified professional third party, contracted on behalf of The Bank.
What is the Lender's Contingency Account?
A Contingency Account is money set aside for unforeseen circumstances or cost overruns that may occur
during the construction or improvement of your home. Disbursement of these funds is on an "as needed"
basis and will generally be in proportion to the completion of the project. Of course, as with other costs, a
Draw Request is required for disbursement of these funds. In addition, evidence of the overrun will also be
required in the form of receipts, paid invoices or cancelled checks. Once construction is complete, any
money remaining in the Contingency Account will be disbursed to you upon your request.
What is the Interest Reserve?
Interest accrues as funds are disbursed on the loan and monthly payments are required to satisfy
thisaccrual. The interest payments for the loan are debited from the interest reserve line item. There are
generally enough funds in an Interest Reserve Account to cover all of the interest payments that may be
dueduring the construction term. If there is no money left in the Interest Reserve Account you will need to
make the interest payments. Interest payments are due on the 1st of the month. If the interest payment is
not received by the 15th of the month, a late charge is assessed. Additionally, disbursements will cease until
interest payments are current.
What if my project is not completed before the
loan term?
Loans that go beyond the required completion date are technically in default pursuant to the Construction
Loan Agreement. If the loan has gone beyond the required completion date, all loan draws are on hold
until an extension is granted. You will need to contact the CTP Customer Service Team at least 30 days
prior to the required completion date if the construction is not at least 90% complete, to discuss your options.
Is there a fee if an extension is needed?
YES, there is a fee associated with an extension of the required completion date.
The fee is:
• .50% of the loan commitment amount per month as provided in Section 3.1 of the Construction
Loan Agreement or,

This publication is designed to provide general information, not legal or technical advice. If legal advice or other expert advice is required, the services of a
competent professional should be sought. Any loan terms referenced in this publication are subject to change without notice.
• .25% of the loan commitment amount per month if you agree to a one-year pre-payment penalty
What is required to roll the construction loan
to a permanent loan?
Loans are rolled to their permanent phase effective the first of each month. The final Draw Request should
be received no later than the end of the construction completion month. Our Roll-to-Perm Department will
contact you once the final disbursement has been made.
How is the Final Draw Request made?
A Final Draw Request can be made when the home is approximately 90% complete. You can request the
remaining 10% of the construction funds and roll the loan to perm. When requesting the Final Draw, the
following items must be submitted:
• Final Draw Request
• Affidavit from your building professional stating all material providers and subcontractors or consultants
have been paid in full
• Unconditional Lien Waiver Upon Final Payment signed by your building professional
• Copy of recorded Notice of Completion (if applicable) and a Certificate of Occupancy
• Evidence of current homeowner's insurance
• Final Progress Inspection In addition, the loan must be in good standing according to the terms of the
Construction Loan Agreement.

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This publication is designed to provide general information, not legal or technical advice. If legal advice or other expert advice is required, the services of a
competent professional should be sought. Any loan terms referenced in this publication are subject to change without notice.

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