Chapter 35 — Key Takeaways

Construction, Renovation, and Reverse: The Loans Most Loan Officers Never Learn

The one idea

Construction and renovation lending both underwrite a value that does not exist yet — the after-improved value, formed by an appraiser from plans and specifications. Every other piece of machinery in those products — builder approval, line-item budget, draw schedule, inspection before disbursement, lien waivers, title date-downs, retainage, contingency reserve, change-order control, completion certification — is a control on one risk: the finished property may be worth less than the plans promised.

Core claims

• A construction lender underwrites four things, not two: the borrower, the plans and specifications, the builder, and the budget — and only then the collateral, valued subject to completion.
• Single-close vs. two-close is a choice about who carries twelve months of risk. Two-close is cheaper to enter and requires the borrower to re-qualify a year later against whatever rates, income, and guidelines then exist. That is the take-out risk, and it is how construction borrowers lose houses they have already paid to build.
• Draws fund work in place, not work planned. Every draw is a lien event: sworn contractor's statement, lien waivers (unconditional for the prior draw, conditional for the current one), and a title date-down endorsement.
• Interest during construction accrues on the drawn balance only — typically a little over half of what a full year on the commitment would cost. Quote the draw-weighted number.
• Standard 203(k) = structural work + a HUD-approved consultant. Limited 203(k) = non-structural, under a dollar cap HUD sets and revises. HomeStyle is Fannie Mae's; CHOICERenovation is Freddie Mac's. 203(k) is FHA and primary-residence only.
• The maximum loan is the lesser of a percentage of cost and a percentage of after-improved value. The cost test stops a disguised cash-out. The value test stops the lender from financing the gap between what improvements cost and what they add — and improvements routinely add less than they cost.
• A HECM is FHA-insured, HUD-administered, has no monthly mortgage payment, and is non-recourse: neither borrower nor estate ever owes more than the home is worth at repayment. The borrower keeps title, and any surplus on sale belongs to them or their estate.
• The principal limit factor rises with the youngest borrower's age and falls as the expected rate rises. Never quote one from memory — pull HUD's current table every time.
• Maturity events: death of the last borrower; sale or conveyance; ceasing to occupy as a principal residence, including absence over twelve consecutive months; failure to maintain the property; failure to pay property charges. That last one is a documented cause of foreclosure on reverse mortgages.
• Counseling is required by statute from a HUD-approved agency, and the financial assessment and Life Expectancy Set-Aside exist because counseling alone was not enough. Sometimes the correct outcome is that there is no loan.
• Occupancy runs one direction — primary, second home, investment — on down payment, price, reserves, and program access. Government programs are primary-residence programs.
• Second liens do not create equity. CLTV caps measure what exists, and HCLTV counts the full HELOC line, drawn or not.

The formulas and rules of thumb

The numbers from this chapter worth remembering

Where deals die in this chapter

• The take-out that wasn't there. A two-close borrower whose income, rates, or appraisal moved during the build, facing a maturing balloon.
• Change orders approved in the field. Nobody re-runs the budget or the value until completion.
• A conditional lien waiver accepted where an unconditional one was required. One word.
• A HECM sold to a borrower who cannot sustain the property charges. The LESA usually catches it. When it does not, you must.
• A cash-out refinance in a higher-rate market to fund an improvement. It repricing the whole first mortgage and restarts the MI clock to borrow a small amount.

Monday morning

You should be able to:

1. Take a construction inquiry and name, in the first two minutes, the four things that must be underwritten and the two questions (lot ownership, contract type) that shape the whole file.
2. Compute construction-period interest on a draw schedule and quote the draw-weighted number instead of the commitment number.
3. Size a 203(k) or HomeStyle from an after-improved value, run both tests, and say which controls and why.
4. Explain a HECM's maturity events to a borrower's adult child, out loud, without notes, including the property-charge dollar figure and the twelve-month absence rule.
5. Apply the six suitability questions and be willing to decline a reverse mortgage that a competitor would write.
6. Price occupancy in dollars on the first call so the Loan Estimate contains no surprises.
7. Compute second-lien room at four CLTV caps in under a minute, and tell a past client "not yet" with arithmetic instead of an apology.