Steps in the Construction Loan Process

The following information is provided as a general guide to the construction loan process.
For more specific information, please contact your lender and/or attorney.

Step One - Pre-qualification

Pre-qualification provides an estimated building budget for the borrower (i.e., how much money the
bank is willing to loan you based upon your financial situation and value of the proposed house..

Verbal - Borrowers verbally provide their loan officer with income and debt information. A
building budget amount is given at this time based upon the information provided. Prequalification is only as accurate as the information provided by the borrower(s). No
application has been taken at this time.

Credit Report - The documented payment history of anyone issued a line of credit. For
example: car loans, student loans, credit cards, etc. We recommend that borrowers review
their credit reports at the Pre-Qualification stage to identify potential problems and/or errors.
If you discover errors it may take months for the credit bureaus to make corrections. Your
loan will be stalled while your credit history is being corrected, so do not wait to check your
credit and make corrections as needed.

Credit Bureaus - Below are links to the three major credit bureaus; you should check your
credit report with all three bureaus.
TransUnion: http://www.transunion.com/
Experian: http://www.experian.com/
Equifax: http://www.equifax.com/home/en_us

Time Table You should begin construction loan paperwork at least three months
(preferably sooner) prior to your target date for beginning construction.

Loan Amount - The loan amount provided in a pre-qualification takes into consideration the
construction costs and land acquisition (if applicable). Please be advised that if the loan
amount does not cover these expenses, the borrowers need to show the proper assets to
cover the difference.

It is VERY IMPORTANT to note that a pre-qualification is not a mortgage approval. The

borrower(s) must make a formal application and the bank must issue a mortgage
commitment letter that designates approval.

Step Two - Application

Application is the formal request for a mortgage approval. When filled in with the borrowers personal
information and submitted with income and asset documentation, the lender underwrites and either
approves or denies a borrowers request for a mortgage.

Application The loan application may be made in person, over-the-phone, or on-line. The
borrowers personal information is collected and added to the application document. The
application and the appropriate mortgage loan disclosures are sent to the borrower(s) to sign
and forward back to the lender. DO NOT submit original documents to your lender.
Make copies of all documents and expect multiple requests for the same document.

Good Faith Estimate - The loan officer will provide the borrower(s) with an itemized list of
estimated costs that the borrower(s) may incur during the mortgage transaction. Assume
that your actual costs will be higher and plan accordingly. Please note: closing costs
do not include escrow deposits (see below).

Underwriting - Once the loan officer receives the application, disclosures, and income and
asset information, an underwriter reviews your request for a mortgage. Expect to be asked
to provide additional documentation at this stage of the process.

Mortgage Commitment Letter - Upon approval, lender issues the commitment letter to
officially state, in writing, under what terms the mortgage is considered approvable. Usually,
the terms of the loan are called loan conditions.

Closing Conditions - The documentation that needs to be obtained prior to closing a

loan. Standard closing conditions include, but are not limited to, the following examples:
building permit, an acceptable appraisal, title insurance, source of the funds (money)
needed to make down payment and closing costs, signed contracts between the
borrower(s) and builder, and any applicable insurance policies (builders risk insurance).

Step Three - Appraisal

Establishes the value of the future home on the borrowers building site. The lender determines the
loan amount from this figure.

Building Contract - A signed and binding agreement between the borrower(s) and builder.
This agreement lists the scope of the work to be completed by the contractor and at what
price. An appraisal can be ordered from the builders quote.

Building Plans - In order to initiate the appraisal, your loan originator needs a set of your
house plans (blue prints). The plans need to show dimension and elevation. You can submit
your preliminary plans for appraisal purposes as long as you do not make any major
changes to the footprint of the house. For example, changing the square footage, adding a
bedroom or bathroom, or taking a designated room away is considered a significant change.
Moving the position of a window or stairs is acceptable. Making major changes also changes
the loan because you have then altered the banks appraised collateral (your house). Your
dealer will provide you with a full set of plans.

Specifications (Specs) - A listing of all of the materials that are to be used during the
construction process. This information enables the appraiser to determine what materials are
going to be used and to assign proper value to the home. Your dealer will provide you with a
specifications sheet.

Time Frame - Depending on the property location and availability of the appraiser, we
recommend allowing 2-3 weeks for appraisal completion.

Step Four - Disbursement Schedule

Illustrates how loan monies are paid-out during construction based on a predetermined set of draws.
Draws are paid as work progresses during the construction phase of the loan.

Disbursement Schedule - The disbursement schedule lists the allocation of loan funds to
be paid by the lender as various phases of the project are completed. For example, when
the foundation has been poured the bank will schedule an inspection to verify that the
foundation is actually poured. The bank will then release funds to you to pay the foundation
contractor. Partial payments may be available when the work has not been completed in full.

Advances may be available should your subcontractor require a deposit prior to starting
work.

Change Orders - Any change orders that are not given to the loan officer prior to the
mortgage closing will not be incorporated into the draw schedule. The borrower(s) will be
responsible for any change orders to their construction contract.

Finalizing Disbursement Schedule - Upon completion of the disbursement schedule, both

the borrower(s) and builder are asked to review and approve the disbursement schedule.

Disbursement Revisions - Changing the disbursement schedule before initial settlement is

acceptable with the approval from the lender. Revisions after initial settlement are also
subject to the approval of the lender. You should thoroughly review the disbursement
schedule with the builder prior to the start of construction.

Step Five - Initial Settlement (Closing)

The signing and recording of mortgage documents by the borrower(s) that permits the borrower(s) to
close on the construction loan and start construction.

Closing Agent - The lender will generally choose the title company or attorney they wish to
review and execute their settlement documents.

Closing Package - The lender sends the closing agent (title company or attorney) a set of
closing instructions and closing documents. The instructions tell the closing agent how the
lender wants the closing documents to be executed (signed).

Title Insurance - The title company or attorney prepares and sends title insurance to the
lender. Title Insurance must be for the loan amount to be obtained. Title Insurance insures
the lender that there are no outstanding liens on the property. Without title insurance, the
lender will not close on a mortgage.

Property Taxes - The lender receives current tax information on the borrower(s) property
from the attorney or title company.

Closing Costs/Fees - Up to this point, your loan officer provided the borrower(s) with a
Good Faith Estimate of Settlement Charges. At closing, actual figures are obtained from both
the lender and settlement agency (title company or attorney) and are recorded on a HUD
statement. You should expect to pay higher fees than were quoted in the Good Faith
Estimate.

HUD - The HUD statement details what the fees are and to whom they have been paid. Your
closing costs at initial settlement may vary from the Good Faith Estimate. Check with your
lender prior to closing to avoid unpleasant surprises.

Please note that initial settlement is when the mortgage note is recorded and construction can begin.
Money cannot be disbursed until the mortgage has been recorded.

Step Six - Construction

During construction, money is disbursed to the borrower(s) and builder to fund the building process
until completion.

Deposit Money - Money payable to the modular home dealer before house construction has
begun. This money is used as deposit to the manufacturer. A deposit of this kind may be
available at initial closing. If applicable, this deposit is shown on the disbursement schedule.
Generally, a 10% deposit is required. Make sure your lender knows that you need a

draw for the house deposit prior to closing. The dealer will provide you with an
invoice for the deposit.

Reimbursement for Borrower Deposit - Money payable to reimburse the borrower for any
monies paid out of pocket prior to the start of construction. Not all borrowers are eligible for
reimbursement. Sufficient equity and approval from the construction department is required
to obtain reimbursement. Borrowers must provide sufficient proof of deposits paid to
manufacturers and contractors in order for reimbursement. For example, canceled checks
and paid invoices.

Draw Request - Upon completion of the required draw items the borrower may order an
inspection to request funds.

Inspections - A property inspection prior to the release of funds. The lender performs
periodic inspections to determine that work is progressing according to the disbursement
schedule. When the inspection is received, the lender releases funds based on the
inspectors assessment. If the items within the requested draw are not completed, a partial
disbursement based on the inspectors recommendation and the approval of the construction
department may be released. Banks charge for inspections, so try to combine several
inspections (well, foundation, septic, etc.) to save yourself money.

Draw Checks - Payment for work completed based on an inspection report. The checks are
normally sent to the borrower(s). Please note: The borrowers account must be current in
order for the draw check to be disbursed.

Title Search - A title search is performed prior to each draw to assure the lender that no
liens have been placed on the property since initial settlement.

Interest Only payments During Construction - During the construction phase, the
borrower(s) are required to make interest only payments. Please ask your loan officer for
details.

Step Seven - Rate Lock

The rate lock is the formal acceptance of a rate for the permanent mortgage. In addition to the
outstanding mortgage balance, the rate lock dictates what the payments will be over the life of the
loan.

Floating Rate - An interest rate that is not locked in and is moving with the current interest
rate market. It is common for construction loans to have a floating rate since the structure will
be completed at a later, undetermined date.

Locked Rate - both the borrower(s) and lender have formally accepted the initial interest
rate for the permanent loan.

Automatic Rate Lock - if the borrower(s) fail to lock in the permanent interest rate prior to
modification, the lender may automatically lock in the interest rate.

Please Note: Borrower(s) want to be very aware of how rates are moving. To track interest rates call
your loan officer.

Step Eight - Modification

Modification is the process of converting the construction loan into the permanent mortgage.

Modification Process - Converting the construction loan into the permanent mortgage. The
modification process starts once the lender receives the final inspection.

Final Inspection - The last inspection performed to insure that the house has been
completed to the same degree at which it was initially appraised. The final inspection is
required in order to convert into the permanent mortgage.

Modification Package - The documents sent from the lender to the closing agent that allows
the borrower(s) to modify their mortgage. At this time, the borrower(s) can apply any
monies left over from the construction loan or from their own pocket to reduce the final loan
amount. If applicable, tax and insurance escrows are set up at this time.

Escrows - An account set up with a lender that holds property taxes and insurance out of
the monthly PITI payment made by the borrower until they are due. Escrow deposits are
separate from closing costs and can amount to many thousands of dollars, payable
at closing. Contact your lender prior to modification to determine how much money
you will need at loan modification.

Final Lien Search - A final lien search is needed to assure to the lender that no liens have
been placed on the property since initial settlement. Upon receipt of a clean final lien
search, loan modification can occur.

Modification Fees - Outstanding fees due to the lender at the time of modification or loan
conversion. These fees usually include, but are not limited to the following items: outstanding
construction interest, interim interest on the permanent loan, an escrow deposit for taxes and
insurance (if applicable), courier fees for overnight draw checks, and inspection fees.

The preceding information is provided as a general guide to the construction loan process.
For more specific information, please contact your lender and/or attorney.