A construction-to-permanent loan requires interest-only payments on amounts advanced during construction and fully amortizing payments after conversion. Which obligations should be explained to the borrower?
Correct Answer
C) Both the construction-phase payment method and the permanent-phase repayment terms
Why this is correct: A construction-to-permanent loan has two distinct phases with different payment structures. As the original explanation notes, the borrower must understand both: the interest-only payments on drawn amounts during construction and the fully amortizing payments after conversion to permanent financing. Why the other choices are wrong: "Only the permanent-phase payment" is wrong because it omits the construction-phase payment method, which affects the borrower's cash flow during construction. "Only the first construction draw" is wrong because it ignores both the full construction payment schedule and the permanent terms. "Neither phase until construction is complete" is wrong because disclosures must be provided before consummation so the borrower can make an informed decision. Exam tip: For two-phase loans, always disclose payment terms for both phases upfront—construction (draw-based) and permanent (amortizing).
Why This Is the Correct Answer
Why this is correct: A construction-to-permanent loan has two distinct phases with different payment structures. As the original explanation notes, the borrower must understand both: the interest-only payments on drawn amounts during construction and the fully amortizing payments after conversion to permanent financing. Why the other choices are wrong: "Only the permanent-phase payment" is wrong because it omits the construction-phase payment method, which affects the borrower's cash flow during construction. "Only the first construction draw" is wrong because it ignores both the full construction payment schedule and the permanent terms. "Neither phase until construction is complete" is wrong because disclosures must be provided before consummation so the borrower can make an informed decision. Exam tip: For two-phase loans, always disclose payment terms for both phases upfront—construction (draw-based) and permanent (amortizing).
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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