An experimental construction-to-permanent lending package intended to serve the growing market of buyers who hire contractors to put up primary or secondary residences of their own lots is being turned into a standard mortgage menu item.

Beginning immediately, Fannie Mae's HomeStyle Construction-to-Permanent Mortgage will be available nationally though 26 lenders, and more will be added all the time, the company said at the National Association of Home Builders convention in Dallas last week.

Fannie Mae doesn't make loans directly to consumers. Rather, the federally chartered financial institution purchases mortgages from local lenders, thereby allowing them to keep their vaults full to satisfy other borrowers.

The loans allows borrowers to combine construction financing and the final take-out loan into a single mortgage, erasing the need for a second, often costly closing. And as a result, buyers don't have to be concerned with requalifying if rates increase in the interim or obtaining another appraisal.

"This mortgage helps eliminate some of the paperwork and cost associated with another closing," Joe Biegel, Fannie Mae's vice president of single-family mortgage business, said at the convention.

The loan also benefits lenders by allowing them to offset some of the risks associated with construction loans. They can lock-in a single interest rate covering both phases, for example, and they can sell the mortgage to Fannie Mae as soon as the loan is closed.

And it plays a significant roll for small builders because they don't have to use their credit to finance the house. "It's a good way for small builders to prevserve their capital," said Paul Garland of Bank United, a major construction lender based in Houston. "This way, you have no financial liability, only performance liability."

The HomeStyle construction-to-perm loan allows borrowers to finance up to 95 percent of the home's value, including the land, to build a single-family, owner-occupied house, or up to 90 percent of two-unit owner-occupied properties and 80 percent of investor properties.

The construction phase can be for six, nine or 12 months. Funds are disbursed at various stages during the building process, and buyers pay interest only on the funds that are paid out. Once the house is completed, the mortgage automatically and seamlessly converts to a permanent first mortgage.

For list of participating lenders, call Fannie Mae's consumer resource center at 800-732-6643.

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Published: January 19, 2000

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