Construction loans involve financing the initial building phase of a residential property. They cater to borrowers who plan to construct a home and require temporary funding until the project is complete. This blog series will be a comprehensive guide on how to process Construction loans efficiently in Encompass.
Encompass and Construction Loans
Encompass supports three primary construction loan scenarios:
- Construction-Only Loans: Designed for financing solely the construction phase. Once construction is complete, the borrower needs separate permanent financing from another lender (take-out lender) or the same lender (refinance). Encompass allows for fixed-rate and adjustable-rate options for these loans.
- Construction-to-Permanent (C-to-P) Loans with Blended Disclosures: This combines both construction and permanent financing into a single loan application, simplifying the process by presenting disclosures for both phases together.
- Construction-to-Permanent (C-to-P) Loans with Separate Disclosures: Similar to blended C-to-P loans, this option covers financing for both phases in one application. However, it uses separate disclosure sets for each stage, providing a more detailed breakdown of the loan terms for each phase.
Encompass offers loan templates pre-configured with the appropriate “Purpose of Loan” option to streamline the selection process. It’s important to note that Encompass does not currently support bi-weekly payment structures or construction loan terms exceeding two years.
Understanding the Construction Management Form
The Construction Management Form plays a central role in managing construction loan data and progress within Encompass. It consists of three key tabs:
- Basic Info: Contains basic borrower and property information, often pre-populated from other Encompass forms like 1003 ULRA forms.
- Loan Info:
- Houses loan details and construction-specific fields.
- The “Purpose of Loan” selection dynamically generates relevant content on the form.
- Selecting “Construction-Only” activates the “Construction Only” section.
- For C-to-P loans with blended disclosures, choosing “Construction-Perm” displays the “Construction – Perm (1x Close)” section.
- Selecting “Construction” followed by checking “Construction Perm Disclosed Separately” activates the “Construction Only” section and the “Linked Loans” tab (applicable for C-to-P with separate disclosures).
- Project Data:
- Allows lenders to input construction dates, pre-closing requirements, disbursement terms, vendor information, and borrower designee contact details.
- Construction-only loans can also have take-out lender information entered here (optional).
Key Considerations for Loan Info
The Loan Info tab plays a crucial role by providing essential fields for construction loans and dynamically adapting the content based on the chosen “Purpose of Loan”:
- No Selection: Displays only “Loan Info” and “Additional Details” sections.
- Construction-Only Loan: Selecting “Construction” activates the “Construction Only” section.
- C-to-P with Blended Disclosures: Choosing “Construction-Perm” displays the “Construction – Perm (1x Close)” section.
- C-to-P with Separate Disclosures: Selecting “Construction” followed by checking the “Construction Perm Disclosed Separately” checkbox activates the “Construction Only” section and the “Linked Loans” tab.
Understanding Lot/Land Status
The Lot/Land Status options define the ownership situation of the land where construction will take place:
- Initial Acquisition: Select this if the borrower is purchasing the lot as part of the construction loan.
- Borrower Owns Land: If the borrower already owns the land outright, clear both checkboxes. However, there’s an important step for loans ordered through the Automated Underwriting System (AUS): Select the “Refinance” checkbox before ordering AUS and then uncheck it before generating disclosures.
Rescission Notice and Additional Details
This section determines if the borrower has the right to cancel the loan under specific regulations. “Secured by Current Dwelling” triggers Encompass to generate a “Notice of Right to Cancel” disclosure. “Non-Rescission Transaction” suppresses the rescission notice.
The “Additional Details” section captures various details crucial for construction loans:
- Expected Construction Completion Date: Enter a valid date before the first amortization date of the permanent phase (C-to-P loans).
- Max LTV (Optional): Enter the maximum loan amount that cannot exceed the final appraised value of the improved property.
- Holdback: Specify the percentage and/or amount of the loan withheld to ensure funds for the final disbursement.
- Project Delay Surcharge: Enter the percentage charged monthly if the project isn’t completed on time.
- Interest Reserves and Payments: Select if the loan requires an interest reserve set
Looking for more information on construction loans in Encompass input forms or need help with implementing any technology solution within Encompass, leave us a message.
