Construction Glossary.
These are just a few of the terms you're likely to hear and read.
For questions about these terms, or anything else involved in the
construction of your house, please give us a call.
Agency Appointment
A legal directive given to the bank from the borrower to make all draw
checks payable to the builder only. The final disbursement will be
made payable to both the borrower and the builder.
Allowance
A maximum amount for a non-fixed cost on a cost breakdown that is
for an item the borrower will pick out, such as carpet.
If a borrower spends less than the maximum amount, they
typically receive the difference in cash.
Amortization Term
The term of the permanent loan. Typically 348 or 168 months.
By Owner Items
Items in a construction project that a borrower is planning to pay
for or complete outside of the terms of the construction contract.
Certificate of Occupancy (CO)
A certificate issued by the city, county or other local authority
stating that construction is complete and the house is ready to be occupied.
Contingency Reserve
A reserve account is usually equal to five to ten percent of the
direct costs of a construction project. The funds are held in reserve
and are made available to cover any unexpected construction overruns or
problems. Any funds remaining in this account at the completion
of construction are applied to the permanent loan as principal
reduction prior to payment reamortization.
Cost Breakdown
The document that itemizes the total cost of construction into
charges for each specific item and stage of construction.
Cost Plus Contract
A contract to build a house that is not based on firm bids, but rather
on whatever the cost may be at the time, plus a percentage for profit.
Cost to Build
The amount of the lot plus the contract price, plus any borrower
paid and/or borrower prepaid items.
Custom Construction Loan
A loan made to a borrower to purchase a lot and have a house built
upon that lot, or to build a house upon a lot already owned by the borrower.
Description of Materials
Also known as "specs." This is the document that describes the
minimum grade and quality of materials to be used in building
the house during the project term.
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Draw
Construction loan progress payments that begin after the loan has closed.
These are funds requested in writing by the builder and borrower to
pay for the completed work.
Fixed Price Contract
A contract to build a house that is based on firm bids and a set price.
Foundation
A concrete bearing wall located below the floor joists of the first
floor or on the ground, which supports the rest of the house.
Interest-Only Period
The stage of a loan wherein the borrower is charged interest only
on the outstanding funds. The borrower is not paying any part of the principal balance.
This is typically the period during construction.
Interest Reserve
An interest reserve account holds the estimated interest amount that
is due on the loan during the construction phase. The lender pays the
interest due as necessary from this account. Any funds remaining in
this account at the completion of construction are applied to the
permanent loan as principal reduction prior to reamortization.
The loan is reamortized prior to rollover.
Loan-to-Value
Loan amount divided by the lesser of the cost of acquisition or
the appraised value. The maximum Loan-to-Value is based on the
occupancy of the property, the loan amount and the maximum
allowed for the number of units.
Lot Loan
A loan made either to an individual or a builder who is purchasing
a lot with the intent to build housing upon it in the future.
Recertification of Value
A determination by the appraiser that the house has been completed
per the plans and specifications that the original appraisal was
based upon, and that the value is consistent with the original determination.
Supervisory Contract
A contract to build a house that is based upon the builder inspecting,
but not taking responsibility for, work performed or the cost of completion.
Sweat Equity
Allowance made when the borrower plans on completing some or part of the
construction of the new home. Sweat equity is allowed only for the
construction of driveways/roads, decks/steps, gutters and downspouts,
appliances and painting/clean-up.
Total Term
This is the total term of the Custom Construction financing - approximately 357 or 177 months.
(Interest-only period, plus the principal and interest payment period.)
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