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Thank you for reading this latest installment of First Federal Bank’s Mortgage Guide blog series! This edition focuses on Construction Mortgage Loans, specifically the 2-Step Construction Loan option offered at First Fed. This loan is ideal for borrowers looking to build a home, but it can initially seem complex. However, with a solid understanding of the requirements, you will be better equipped and know your options when it comes time to build your dream home! Let’s dive in!

A 2-Step Construction loan involves two separate closings: one for the construction phase of a home and then one for the permanent financing after the home is built. The first loan covers construction costs, while the second converts the construction loan into a traditional mortgage.

• First Closing: This loan is a short-term, 12-month loan with interest-only payments during construction.
• Second Closing: After construction is completed, the short-term loan is refinanced into a long-term mortgage loan.

Credit Score Requirements – First Fed requires a minimum credit score of 700 on a 2-Step Construction loan. The credit score requirement is higher for this loan compared to others because construction loans are considered riskier (due to the uncertainty of the building process). Borrowers with lower credit scores may still be eligible but with compensating factors, such as a larger down payment or additional assets that can be taken into consideration for collateral.

Down Payment Requirements - A 10% down payment is required for the first closing construction loan. The down payment is calculated based on the total loan amount for the home (including construction costs and the value of the home lot, if applicable). The larger the down payment a customer makes, the more favorable their financing terms will typically be.

Private Mortgage Insurance (PMI) - If the Loan-to-Value (LTV) of the second closing loan exceeds 80%, private mortgage insurance (PMI) will be required. However, PMI is not a factor for the first closing construction loan.

Debt-to-Income (DTI) Ratio - The DTI ratio is a crucial factor in qualifying for a construction loan. First Fed requires a back-end DTI (total debt, including housing, credit cards, loans, etc.) for the second closing loan to be under 45%.

Use this calculator to figure out your DTI!

Other Important Considerations

• Second Closing Fee Discount: A key benefit of First Fed's 2-Step Construction option is that we offer a 0.5% origination fee discount on the second closing (the permanent mortgage). We want to make it easy to have the same lender from lot to home!
• Waived Document Preparation Fee: We also waive the document preparation fee ($995) on the second closing, saving customers additional costs and making the transition from construction financing to permanent financing easier.
• Appraisal: Typically, an appraisal is needed prior to both the construction loan closing and the permanent loan closing. The appraisal will include the estimated value of the completed home to ensure it meets the required Loan-to-Value ratio.
• Construction Timelines: Construction delays could result in extension fees. First Fed encourages customers to work closely with their builder to make sure things remain on schedule.

Recapping 2-Step Construction Loans:

• Credit Score: Minimum of 700.
• Down Payment: A minimum 10% downpayment is required for the first closing construction loan.
• Private Mortgage Insurance (PMI): If the Loan-to-Value (LTV) of the second closing loan exceeds 80%, PMI will be required. PMI is not a factor for the first closing construction loan.
• Debt-to-Income (DTI) Ratio: 45% maximum back-end DTI ratio for the second closing loan.

At First Fed, our goal is to ensure that a customer can comfortably manage both the construction loan payments while the house is being built as well as the eventual second loan mortgage payments. This is something that we discuss in detail during our initial loan conversations with interested customers.

We hope you found this blog helpful and that it has assisted you in your financial well-being journey. If you have additional questions about this mortgage option or other home loans, we encourage you to contact one of our First Federal Mortgage Loan Professionals.

In our next Mortgage Guide edition we'll explain the factors that go into determining mortgage interest rates.

*All credit products subject to approval.