Some construction/permanent financings have 2 loans


January 13, 2002

Dear Mr. Azrael,

I am about to close on the permanent portion of a construction/permanent loan and was reviewing the good faith estimate.

I saw that I was being charged a second time for all the same items (processing fees, loan documentation, flood certificates, underwriting, etc.) that I paid for at the construction closing. Is this double dipping of costs legitimate/legal, or are they just charging me and seeing if I will pay them?

Jeffrey Addison Baltimore

Dear Mr. Addison,

There are several types of construction/permanent financing. Some lenders offer a single loan that covers both the home construction and permanent financing. Typically, this type of loan involves one closing and one set of loan documents.

The loan documents provide for payment of interest on amounts advanced during the construction period. When the home has been completed, and an occupancy permit issued, the loan converts to a permanent loan, payable in monthly installments of principal and interest over a fixed period (15 or 30 years). The permanent loan rate usually is locked in at the time of the closing.

Since there is only one closing, there is only one good-faith estimate and a single set of lender charges for underwriting, document preparation, flood certifications, etc.

Another type of construction/permanent financing involves two separate loans. The first loan is for construction only. It is a short-term loan (one year or less), requiring payments of interest only. The loan proceeds are disbursed in draws over the construction period.

At or before the end of the loan term, the home is completed, and the borrower refinances the construction loan with a new permanent loan. The permanent loan may be with an entirely different lender than the construction loan. The rate of the permanent loan often is not locked in until shortly before the loan is funded.

Since the permanent loan is a new and separate loan, it is legal for the lender to charge additional fees for underwriting, document preparation and flood certification, among other items. The permanent loan includes a payoff of the initial construction loan.

From your question, it appears that your permanent loan was a refinancing loan, which replaced and paid off the construction loan. The second set of lender's charges was legal.

There are significant differences in the cost of construction/permanent financing.

Borrowers should shop carefully and compare overall costs before selecting a lender or broker in this situation.

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