Two-closing construction-to-permanent mortgage transactions utilize two separate loan closings with two separate sets of legal documents. A modification may not be used to update the original note, rather a new note must be completed and signed by the borrower(s). The first closing is to obtain the interim construction financing (and may include the purchase of the lot), and the second closing is to obtain the permanent financing upon completion of the improvements. Fannie Mae does not purchase construction loans (the first closing); however, Fannie Mae does purchase loans that were used to provide the permanent financing.
The lender that provides the permanent long-term mortgage may be a different lender than the one that provided the interim financing. The lender must underwrite the borrower based on the terms of the permanent mortgage.
In a two-closing construction-to-permanent transaction, the permanent mortgage delivered to Fannie Mae may be closed as:
a limited cash-out refinance transaction, or
a cash-out refinance transaction.
Two-closing construction-to-permanent mortgages are subject to the limited cash-out and cash-out refinance maximum LTV, CLTV, and HCLTV ratios based on the property type provided in the Eligibility Matrix, as applicable. For the borrower to be eligible for a cash-out refinance transaction, the borrower must have held legal title to the lot for at least six months prior to the closing of the permanent mortgage. All other standard cash-out refinance eligibility and underwriting requirements apply.
Note: Two-closing cash-out refinances are not permitted on a manufactured home.
The table below provides references to the Announcements that have been issued that are related to this topic.