B5-3.1-02, Conversion of Construction-to-Permanent Financing: Single-Closing Transactions (03/02/2022)

This topic contains information on construction-to-permanent financing loan eligibility for single-closing transactions, including:

• Single-Closing Transaction Overview
• Terms of Construction Loan Period for Single-Closing Construction-to-Permanent Mortgages
• Eligible Loan Purposes for Single-Closing Construction-to-Permanent Mortgages
• Calculating the LTV Ratio for Single-Closing Construction-to-Permanent Mortgages
• Down Payment Requirements for Single-Closing Purchase Transactions
• Modifications of Single-Closing Construction-to-Permanent Mortgages
• Underwriting Single-Closing Construction-to-Permanent Mortgages
• Age of Credit Documents
• Age of Appraisal Documents
• Requalification Requirements
• Loan Conversion Documentation Options

Single-Closing Transaction Overview

Single-closing transactions may be used for both the construction loan and the permanent financing if the borrower wants to close on both the construction loan and the permanent financing at the same time. When a single-closing transaction is used, the lender will be responsible for managing the disbursement of the loan proceeds to the builder, contractor, or other authorized suppliers.

Because the loan documents specify the terms of the permanent financing, the construction loan will automatically convert to a permanent long-term mortgage loan upon completion of the construction.

Loans that combine construction and permanent financing into a single transaction cannot be purchased by Fannie Mae until the construction is completed and the terms of the construction loan have converted to the permanent financing.

Lenders must use SFC 151 when delivering single-closing construction-to-permanent loans to Fannie Mae (and any other SFCs that may apply to the transaction).

Terms of Construction Loan Period for Single-Closing Construction-to-Permanent Mortgages

For all single-closing construction-to-permanent transactions, the construction loan must be structured as a temporary loan exempt from the ability to repay requirements under Regulation Z. The construction loan period for single-closing construction-to-permanent transactions may have no single period of more than 12 months and the total period may not exceed 18 months. Lenders may, when needed to complete the construction, provide an extension to the original period to total no more than 18 months but the documents may not indicate an initial construction period or subsequent extension of more than 12 months. After conversion to permanent financing, the loan must have a loan term not exceeding 30 years (disregarding the construction period).

As examples, lenders may structure the construction loan period as follows:

• three 6–month periods,
• one 12–month period and one 6–month period, or
• six 3–month periods.

Exceptions to the 12-month and 18-month periods will not be granted. The above construction period requirements do not apply to two-closing construction-to-permanent transactions. If the construction loan period exceeds the requirements above, the lender must process the loan as a two-closing construction-to-permanent transaction in order for the loan to be eligible for sale to Fannie Mae (see B5-3.1-03, Conversion of Construction-to-Permanent Financing: Two-Closing TransactionsB5-3.1-03, Conversion of Construction-to-Permanent Financing: Two-Closing Transactions ).

Eligible Loan Purposes for Single-Closing Construction-to-Permanent Mortgages

A single-closing construction-to-permanent mortgage loan may be closed as:

• a purchase transaction, or
• a limited cash-out refinance transaction.

When a purchase transaction is used, the borrower is not the owner of the lot at the time of the first advance of interim construction financing, and the borrower is using the proceeds from the interim construction financing to purchase the lot and finance the construction of the property.

When a limited cash-out refinance transaction is used, the borrower must have held legal title to the lot before they receive the first advance of interim construction financing. The borrower is using the proceeds from the construction financing to pay off any existing liens on the lot and finance the construction of the property. This type of transaction is not a “true” limited cash-out refinance whereby the borrower refinances a loan(s) that was used to purchase a completed property; however, all other requirements for limited cash-out refinances apply. See B2-1.3-02, Limited Cash-Out Refinance TransactionsB2-1.3-02, Limited Cash-Out Refinance Transactions and the limited cash-out refinance requirements in B5-2-03, Manufactured Housing Underwriting RequirementsB5-2-03, Manufactured Housing Underwriting Requirements .

Note: Cash-out refinance transactions are not eligible for single-closing construction-to-permanent mortgages.

Calculating the LTV Ratio for Single-Closing Construction-to-Permanent Mortgages

Single-closing construction-to-permanent mortgages are subject to the purchase and limited cash-out refinance maximum LTV, CLTV, and HCLTV ratios (based on property type) provided in the Eligibility Matrix , as applicable.

The LTV ratio calculation differs depending on whether the transaction is a purchase or a limited cash-out refinance, as shown in the table below.

• the purchase price (sum of the cost of construction and the sales price of the lot), or
• the “as completed” appraised value of the property (the lot and improvements).

Down Payment Requirements for Single-Closing Purchase Transactions

The borrower must use their own funds to make the minimum borrower contribution unless:

• the LTV, CLTV, or HCLTV ratio is less than or equal to 80%; or
• the borrower is purchasing a one-unit principal residence and meets the requirements to use gifts, donated grant funds, or funds received from an employer to pay for some or all of the borrower's minimum contribution. See B3-4.3-04, Personal GiftsB3-4.3-04, Personal Gifts ; B3-4.3-06, Grants and Lender ContributionsB3-4.3-06, Grants and Lender Contributions ; and B3-4.3-08, Employer AssistanceB3-4.3-08, Employer Assistance , for additional information.

Modifications of Single-Closing Construction-to-Permanent Mortgages

If the terms of the permanent financing change after the original closing date of the construction loan, the loan may be modified to reflect the new terms if it meets all of the following criteria:

• The modification must take place prior to or at the time of conversion.
• Only the following loan terms may be modified in a single-closing transaction:
  • interest rate,
  • loan amount,
  • loan term, and
  • amortization type.

  The only amortization change permitted is from an adjustable-rate amortization to a fixed-rate amortization.

  Changes made to any other loan terms will require a two-closing construction-to-permanent transaction.

  • extends the effective date of the coverage to the date of the recording of the modification agreement;
  • increases the amount of the policy to the original loan amount, as increased; and
  • confirms that the lien of the mortgage, as modified, continues to be a first lien.

  Note: Both the original construction loan amount at closing and the final modified loan amount delivered to Fannie Mae must meet the loan limits currently in effect.

  • Loan Modification Agreement (Providing for Fixed Interest Rate) (Fannie Mae Form 3179);
  • Loan Modification Agreement (Providing for Adjustable Interest Rate) (Fannie Mae Form 3161); or
  • A substantially similar document, subject to the non-standard document representations and warranties.

  Underwriting Single-Closing Construction-to-Permanent Mortgages

  The lender must underwrite a single-closing construction-to-permanent loan based on the terms of the permanent financing. If the permanent financing terms are modified, and no longer reflect the terms on which the underwriting was based, the loan must be re-underwritten, subject to certain re-underwriting tolerances. The loan data at delivery must match the data in the final submission of the loan casefile to DU.

  As described in the table below, re-underwriting tolerances may be applied if the interest rate or loan amount was modified. (All other modifications require re-underwriting.)

  • For loans underwritten through DU: see the tolerances and resubmission requirements in B3-2-10, Accuracy of DU Data, DU Tolerances, and Errors in the Credit ReportB3-2-10, Accuracy of DU Data, DU Tolerances, and Errors in the Credit Report .
  • For manually underwritten loans: if the recalculated DTI (based on the change in rate or loan amount) does not exceed 45%, the loan must be re-underwritten with the updated information to determine if the loan is still eligible for delivery.

  Note: If the increase in the DTI ratio moves the DTI ratio above the 36% threshold, the loan must meet the credit score and reserve requirements in the Eligibility Matrix that apply to DTI ratios greater than 36% up to 45%.

  Age of Credit Documents

  All credit documents must be no more than four months old on the note date (that is, the closing date of the construction loan). Additionally, income, employment, and credit report documents must be no more than four months old at the time of conversion to permanent financing. As an exception, these documents may be more than four months but not exceeding 12 months old at the time of the conversion to permanent financing if all of the following conditions were met at the time of the original closing of the construction loan:

  • The LTV, CLTV, and HCLTV ratios do not exceed 95%.
  • The representative credit score of the loan is greater than or equal to 700.
  • The loan casefile was underwritten through DU and received an Approve/Eligible recommendation.

  If any one of the above conditions was not met or an eligible loan term was modified subsequent to the last DU submission, the lender must

  • obtain updated income, employment, and credit report documents no more than four months prior to conversion; and
  • re-qualify the borrower(s) in accordance with the Requalification Requirements below.

  Updated asset documentation is not required at the time of conversion to permanent financing (regardless of the age of asset documents) unless upon requalification, either of the following applies:

  • more reserves are required than were required at the time of original qualification
    • the full amount of reserves must then be reverified, or
    • the additional funds must come from an eligible source and be documented.

    Impact on Validation through the DU Validation Service

    If updated credit documents are required to be obtained after the original closing of the construction loan, any validation of income, employment, or assets is no longer applicable. Updated validation reports must be obtained, and the loan casefile resubmitted to DU, and the loan must convert to permanent financing by the Close By Date stated in the DU validation message in order for validation and the associated waiver of enforcement relief of representations and warranties to apply.

    Age of Appraisal Documents

    For all single-closing transactions, the effective date of the appraisal must be no more than four months prior to the note date (that is, the closing date of the construction loan). Additionally, at the time of completion of construction, an Appraisal Update and/or Completion Report ( Form 1004D ) must be completed in its entirety including the appraisal update and certification of completion. If the appraiser indicates on the Form 1004d that the property value has declined, then the lender must obtain a new appraisal for the property and requalify the borrower using the updated LTV ratio per the Requalification Requirements, below.

    Requalification Requirements

    Requalification of the borrower(s) is required at the time of conversion to permanent financing if

    • the LTV ratio increased due to a decline in property value,
    • updated credit documents were obtained, or
    • as otherwise required per the modified loan term in the table above.

    To be eligible for purchase by Fannie Mae, the loan must retain an Approve/Eligible recommendation after resubmission to DU (or, be eligible per the Eligibility Matrix if manually underwritten).

    When requalification is required

    • the LTV ratio must be adjusted based on the updated appraisal, if applicable;
    • if credit documents exceed the four (or 12) month age of documentation requirement, the updated income, credit, and liability information must be considered; and
    • the loan data at delivery must match the data considered in the final requalification of the loan.

    Loan Conversion Documentation Options

    The construction loan may be converted into a permanent loan in either of the following ways:

    • Option 1: A construction loan rider must be used to modify Fannie Mae’s uniform instrument that will be used for the permanent loan. The rider must state the construction loan terms, and the construction-related provisions of the rider must become null and void at the end of the construction period and before the permanent loan is sold to Fannie Mae. Because the permanent loan cannot be sold before it is scheduled to begin amortizing, the lender will need to amend the construction loan rider, and the accompanying uniform instrument, if the construction is completed sooner or later than originally anticipated. The amendment(s) should provide the new dates on which amortization for the permanent loan will begin and end. The lender also will need to record the amended documents before the permanent loan is sold.
    • Option 2: A separate modification agreement must be used to convert the construction loan into permanent financing. This agreement must be executed and recorded in the applicable jurisdiction before the permanent loan is sold to Fannie Mae.

    The lender must include the applicable conversion document in its loan submission package. When amended documents are recorded in connection with a construction loan rider, the lender also must include a copy of the original documentation that the borrower signed.

    Recent Related Announcements

    The table below provides references to recently issued Announcements that are related to this topic.

    Announcements	Issue Date
    Announcement SEL-2022-02	March 02, 2022
    Announcement SEL-2021-08	September 01, 2021
    Announcement SEL-2019-07	August 07, 2019