Asking this on behalf of a colleague...

Scenario: 5 year loan, with 1 year construction period, 48 month repayment period, with P&I based on a longer amortization period, whereby a balloon payment will be due. Purpose is for construction of owner occupied single family residence.

Apparently the loan terms place it in the "higher priced mortgage loan" category.

What I am told is that the loan processing area is saying that an estimated escrow amount must be added back to the initial loan principal ? [e.g. say that loan request was for $500,000 and estimated escrows are $5,000 then new loan amount would be $505,000?]

While, if what I am told is so, I say that it does not make sense, a wise attorney once told me that if it is the law, it does not have to make sense...

In my long ago past in working with construction perm mortgages, we made sure at the initial closing that a builder's risk policy was in place and that any taxes currently due were paid...then at the time of conversion to a permanent mortgage we established an escrow account [usually from the final draw although it could have been from outside cash from borrower].

However, we never changed our loan amount for the purpose of adding back estimated escrows...we loaned 80% of appraised value or contract price...we did not tack on estimated escrows and thereby cause the LTV to exceed 80%.

I am not thoroughly familiar with the provisions for higher priced mortgage loans, but even if for some reason you must establish an escrow account up front on a construction perm loan, would you not fund that either from other funds of the borrower or possibly from an initial draw from the loan [we did permit closing costs to come from the initial draw if the borrowers so elected.]?


"I know so little as to be almost, if not completely, confused and just enough to be dangerous."

If the loan is a one phase const/perm loan that falls in the HPML category the escrow account must be established at consummation.

If it is a two phase const/perm loan then the escrow can be established at consummation of the permanent phase financing.

Thanks...even if the escrow account must be established at consummation, is there any requirement to do so by "adding to" the principal balance of what would otherwise have been an 80% LTV? Can the note amount remain at 80% LTV and fund either via a draw or via other funds from the borrower?

How you fund the initial deposit is between you and your borrower. The borrower can pay it in cash, have it added to the loan amount or subtracted from the loan proceeds. Adding to the loan amount would affect your LTV as it would be additional monies being borrowed.