For some reason in the back of my mind, I believe the credit union is limited to 12 months on short-term construction loans, and if we wanted to go longer than that, we needed to make it a one-time close (or do extensions). Is this an old rule I’m remembering? Or could you point me to that regulation?
The biggest issue is that temporary loans with a loan term greater than 12 months are subject to Reg Z Ability Repay (ATR) requirements.
For ATR purposes, the regulation requires the lender to use “the maximum payment scheduled during the first five years after the date on which the first regular periodic payment will be due” when calculating the borrower’s debt-to-income ratio. In many cases, this means a balloon payment must be included in the calculation, which will make the loan unaffordable for most borrowers.
Interestingly enough (or maybe only interesting to me), the commentary to this section of Reg Z anticipates a 12-month construction loan may need to be renewed. It clearly explains a renewal of a 12 month construction loan is still exempt from ATR requirements as the initial term was 12 months:
In addition, if the construction loan is secured by a home that will become the principal dwelling of the borrower and the term is longer than one year, you would also need to provide ARM disclosures if the rate is variable.
Construction-only loans or the construction phase of construction-permanent loans should have terms no longer than 12 months. If you need to, you can modify the loan to extend the construction phase if necessary (the modification must be done before the loan is due).
For more information, email Lisa Quaranta.
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For more information, email Lisa Quaranta.
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