In a two-closing structure, what typically happens when construction is complete and permanent financing is ready?
Correct Answer
B) A separate permanent loan is consummated and pays off or replaces the construction financing
Why this is correct: In a two-closing structure, there are two separate loans: a short-term construction loan and a long-term permanent mortgage. As the original explanation states, when construction is complete, a separate permanent loan is consummated, and its proceeds pay off the construction financing. Why the other choices are wrong: "The construction loan automatically becomes unsecured" is wrong because the construction loan is secured by the property; it is paid off, not converted to unsecured debt. "The builder becomes the permanent borrower" is wrong because the borrower typically remains the same (often the homeowner), unless a separate assumption occurs. "No new underwriting or closing can occur" is wrong because the permanent loan requires new underwriting and a new closing, as it is a separate transaction. Exam tip: Two-closing means two separate loans: construction loan first, then permanent loan (with its own closing) pays it off.
Why This Is the Correct Answer
Why this is correct: In a two-closing structure, there are two separate loans: a short-term construction loan and a long-term permanent mortgage. As the original explanation states, when construction is complete, a separate permanent loan is consummated, and its proceeds pay off the construction financing. Why the other choices are wrong: "The construction loan automatically becomes unsecured" is wrong because the construction loan is secured by the property; it is paid off, not converted to unsecured debt. "The builder becomes the permanent borrower" is wrong because the borrower typically remains the same (often the homeowner), unless a separate assumption occurs. "No new underwriting or closing can occur" is wrong because the permanent loan requires new underwriting and a new closing, as it is a separate transaction. Exam tip: Two-closing means two separate loans: construction loan first, then permanent loan (with its own closing) pays it off.
More Origination Questions
Before the team acts on a servicing handoff check, a closing coordinator must address Asset Verification and Reserves. Which response is most defensible?
An MLO is reviewing procedures for a case where a cost changes after the Closing Disclosure has already been provided. What is the proper handling?
During a post-application update, a quality-control reviewer encounters a Credit Analysis and Evaluation issue. Which response should avoid a shortcut that would misapply the rule?
A construction-to-permanent loan will disburse in 5 draws over 11 months before the permanent phase begins. Which Regulation Z appendix provides a disclosure method for multiple-advance construction transactions?
Before closing, the team discovers that a borrower asks which upfront charge can be collected before intent to proceed. What is the safest compliant answer?
A construction loan agreement allows advances only after documented completion of specified work. A builder requests the next draw, but no completion evidence has been provided. What should occur?
Before releasing the final construction draw, which combination most directly supports project completion and clear collateral?
A construction-to-permanent loan will convert to a substantially higher fully amortizing payment. Which payment is especially important when assessing the borrower's long-term repayment capacity?
A construction-to-permanent note states that conversion requires completion, a certificate of occupancy, and no unresolved liens. Construction is finished, but a mechanic's lien remains. What should happen?
A branch manager asks about a loan file because a processor wants to omit known monthly obligations from underwriting. What should happen?
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