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ATR – Purchase with Renovations

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  • #5304
    rcooper
    Keymaster

    A question we received from a member:

    We have several loan situations where a customer buys home that came through foreclosure which needs some remodeling. We advance funds to purchase and make the needed improvements. Most of the definitions of construction for exemptions under the regs appear to be for initial construction. Normally, we would allow these customers a 6 -12 month term with interest only to get the remodeling completed. Will the new rules force us to put on monthly payments if we want them to be qualified mortgages or would this be considered construction?

    #5305
    rcooper
    Keymaster

    From reading the commentary (see below) it seems rehabilitation and improvement are considered construction in this type of situation. In as a construction/perm you would qualify the permanent phase as a QM, but the construction phase (of 12 months or less) would be exempt from the requirements.

    The commentary, Paragraph 43(a)(3) – 2 states:
    2. Construction phase of a construction-to-permanent loan. Under § 1026.43(a)(3)(iii), a construction phase of 12 months or less of a construction-to-permanent loan is exempt from § 1026.43(c) through (f). A construction-to-permanent loan is a potentially multiple-advance loan to finance the construction, rehabilitation, or improvement of a dwelling that may be permanently financed by the same creditor. For such a loan, the construction phase and the permanent phase may be treated as separate transactions for the purpose of compliance with § 1026.43(c) through (f), and the construction phase of the loan is exempt from § 1026.43(c) through (f), provided the initial term is 12 months or less. See § 1026.17(c)(6)(ii), allowing similar treatment for disclosures. Where the construction phase of a construction-to-permanent loan is renewable for a period of one year or less, the term of that construction phase does not include any additional period of time that could result from a renewal provision. For example, if the construction phase of a construction-to-permanent loan has an initial term of 12 months but is renewable for another 12-month term before permanent financing begins, the construction phase is exempt from § 1026.43(c) through (f) because the initial term is 12 months. Any renewal of one year or less also qualifies for the exemption. The permanent phase of the loan is treated as a separate transaction and is not exempt under § 1026.43(a)(3)(iii). It may be a qualified mortgage if it satisfies the appropriate requirements.

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