Construction Conversion and Renovation Mortgages FAQ

The Seller may use the applicable Freddie Mac Construction Conversion Modification Agreement(s) described in the chart above or develop their own modification agreement using Freddie Mac's examples. However, the Seller's modification agreement must not incorporate the terms of the Note for the Permanent Financing in those situations where Freddie Mac requires that a new Uniform Note be used.

If the Seller uses a different Construction Conversion Modification Agreement than those described above to evidence the terms of the Permanent Mortgage, Seller represents and warrants that the instrument, when completed:

• Contains substantially identical provisions to the comparable Freddie Mac Construction Conversion Modification Agreement form, and
• Is appropriate for use to evidence the conversion of Interim Construction Financing to Permanent Financing.
   

This is defined in the Single-Family Seller/Servicer Guide Glossary: 

The date of the closing on the Permanent Financing and the date the term of the Permanent Financing begins; or, for Construction Conversion Mortgages and Renovation Mortgages, the date when the Interim Construction Financing is deemed to be paid off or converted or modified to and replaced by the Permanent Financing. The Effective Date of Permanent Financing is as follows:
 

A Construction Conversion or Renovation Mortgage that is a “no cash-out" refinance transaction may pay off junior liens provided the lien(s) were used in their entirety for the construction and/or renovation of the subject property. However, using mortgage proceeds to pay off construction costs paid by the borrower outside of the secured Interim Construction Financing is considered cash out to the borrower, if above $2,000 or 1% of the loan amount, whichever is greater. A mechanic’s lien would normally not be eligible because it is a construction cost paid by the borrower outside of the secured Interim Construction Financing. 

Requirements for refinance transactions:

1. “No cash-out” refinance transactions
   
   “No cash-out” refinance transactions must meet the requirements in Section 4301.4, except as stated below.
   For purposes of Section 4301.4, the amount of the Interim Construction Financing secured by the Mortgaged Premises is considered an amount used to pay off the first Mortgage as described in Section 4301.4. The proceeds of the Permanent Financing may be used to pay off a junior lien(s) secured by the Mortgaged Premises provided the lien(s) were used in their entirety for the construction and/or renovation of the subject property, as applicable, as documented in the Mortgage file.
   Paying off unsecured liens or construction costs paid by the Borrower outside of the secured Interim Construction Financing is considered cash out to the Borrower, if above $2,000 or 1% of the loan amount, whichever is greater.
    
2. Cash-out refinance transactions
   
   Cash-out refinance transactions must meet the requirements in Section 4301.5. Cash-out refinance Mortgages that are Construction Conversion Mortgages and Renovation Mortgages may not be secured by Manufactured Homes.
   At least one Borrower must have been on the title to the land for six months or more prior to the Effective Date of Permanent Financing.
   Special purpose cash-out refinance Mortgages are ineligible as Construction Conversion Mortgages and Renovation Mortgages.

Proceeds from the interim construction financing may be used for:

Purchase transaction:

• Purchase the land or acquire a leasehold interest in the land
• For Renovation Mortgages, purchase the site-built home
• Pay construction or renovation costs of the site-built home
• For a Manufactured Home, acquire the Manufactured Home and pay construction costs, including costs to install and anchor the Manufactured Home on a permanent foundation system
   

Refinance Transactions:

• Pay off any existing liens on the land and on the improvements, if the Mortgage is a Renovation Mortgage
• Pay off any existing liens on the land, if the Mortgage is a Construction Conversion Mortgage
• Pay all Closing Costs
• Pay construction or renovation costs of the site-built home
• For a Manufactured Home, acquire the Manufactured Home and pay construction costs, including costs to install and anchor the Manufactured Home on a permanent foundation system on land owned by the Borrower

The proceeds of the Permanent Financing may be used to pay off a junior lien(s) secured by the Mortgaged Premises provided the lien(s) were used in their entirety for the construction and/or renovation of the subject property, as applicable, as documented in the Mortgage file. 

Paying off unsecured liens or construction costs paid by the Borrower outside of the secured Interim Construction Financing is considered cash out to the Borrower, if above $2,000 or 1% of the loan amount, whichever is greater.
 

Paying off unsecured liens or construction costs paid by the Borrower outside of the secured Interim Construction Financing is considered cash out to the Borrower, if above $2,000 or 1% of the loan amount, whichever is greater.

Question: When a borrower completes interim construction financing and permanent financing with different lenders, is the permanent financing considered a Construction Conversion Mortgage or is it a standard refinance transaction of a newly constructed property regardless of the land being owned at the time of interim financing? (Guide Section 4602.1)

Answer: A transaction where the loan proceeds are used to replace Interim Construction Financing is - considered a Construction Conversion Mortgage, provided the Mortgage meets the requirements of Guide Chapter 4602.

The builder/developer must not be obligated to repay the Interim Construction Financing or any Mortgage on the land or the improvements except when the builder/developer is the Borrower on the Permanent Financing and will occupy the Mortgaged Premises as their Primary Residence.

This may be related to an interested party contribution and meet the requirements of Section 5501.5.

Typically, the borrower on the Permanent Financing must be the borrower on, and obligated to repay, the Interim Construction Financing, and any other outstanding prior financing, including installation financing or outstanding prior mortgages. However, a borrower may be omitted in the event of a divorce.

Sufficient documentation to validate the actual cost to construct or renovate the home must be included in the mortgage file. Examples include, but are not limited to: purchase contracts, plans and specifications, receipts, invoices and lien waivers.

• A document that clearly shows the Seller's calculation of the purchase price and/or cost to construct
• The Settlement/Closing Disclosure Statement or an alternative form required by law evidencing all costs to homebuyer and property seller at closing of the Interim Construction Financing
• For a Mortgage secured by a Manufactured Home, the manufacturer's invoice and the Manufactured Home Purchase Agreement
   

Value used to determine the loan-to-value (LTV), total LTV (TLTV) and Home Equity Line of Credit (HELOC) TLTV (HTLTV) ratios must be established as follows:

*If the borrower acquired the land as a gift or by inheritance, the value of the land as reported on the appraisal may be used in lieu of the purchase price of the land.

Any item that is included in the calculation of cost to construct or renovate the home must be commonly and customarily included in the cost to construct other homes in the area where the Mortgaged Premises is located. The cost to construct must not include items such as furniture, electronic and home entertainment equipment, or other personal items.
 

Yes, a Construction Conversion Mortgage may be secured by a newly purchased Manufactured Home that has never been attached to a foundation. The installation must be fully complete, including permanent utility connections and construction of any site-built improvements such as garages, decks, or porches, before the mortgage can be sold to Freddie Mac as evidenced by a satisfactory completion report.

All improvements must be fully completed before the sale of the mortgage to Freddie Mac except for mortgages secured by site-built homes meeting the requirements in Section 5601.3 and for which completion escrows are established in accordance with the requirements of Section 5601.3.

No, the Seller must obtain an appraisal with a full interior and exterior inspection that meets Freddie Mac requirements for the applicable property type.

If the borrower acquired the land as a gift or by inheritance, the value of the land as reported on the appraisal may be used in lieu of the purchase price of the land when calculating value in accordance with Section 4602.10.