1. Loan Settlement and Interest Payments

This section answers questions about the structure of your loan's proceeds, interest charges associated with your loan, and reserve accounts that may be set up for you.

When a OTC loan is settled, First Horizon Construction Lending sets the loan up according to the charges outlined on your Hud-1 Settlement Statement. Aside from the funds held to construct your home, your construction mortgage may have paid off or purchased the lot for the home. Funds may have also been allotted for closing costs. Construction Lending sets up your construction account to track these items.

Your loan may also have reserve funds set aside during construction for other costs. One such reserve may be an Interest Reserve Account. These funds are automatically deducted on the first day of each month for interest due on construction funds used the preceding month. You will receive an interest invoice in the mail that will state the amount paid from interest reserve. During construction this account may or may not be completely depleted. If the funds deplete prior to completion of the project, your monthly statement will show an amount due.

Interest invoices are mailed on the first business day of the month. This bill represents interest accrued for construction funds used as the last day of the previous month. This payment is due no later than the 15th day of the month. A late fee will be charged after that date. All payments should be mailed using the envelope provided in the statement. Payments currently cannot be made using credit cards or any form of automatic deduction initiated by First Horizon Construction Lending.

Another such reserve that may be set aside is the Modification Reserve Account. You may have noticed at your initial closing that no funds were collected for future escrow such as funds for payment of property taxes, hazard insurance premiums, and mortgage insurance. Based on the current OTC process, these escrow accounts cannot be set up until the construction loan is complete and the permanent loan is in place with scheduled monthly principal and interest payments. Many borrowers choose to allow for Modification Reserves to be set aside. Interest is not charged on these funds until they are used to set up your escrow account at modification. This fund is solely for the purpose of setting reserves for future payments on escrow items, and any construction interest that may be due at modification signing. During the construction process, any insurance and property taxes due are your responsibility.

Any unused loan proceeds set up as Interest Reserve, Modification Reserve, or Contingency Reserve funds will not be refunded. Instead, this amount would simply be unused and your permanent loan would reflect a principal balance or only the total amount of loan proceeds used.

Any changes in borrower information should be directed to our office in writing via fax, mail or email. Please refer to your loan number when requested changes such as address, phone numbers, etc.

2. The Draw Process

During the time you home is under construction, your builder will request funds in the form of draws - provided by your One-Time Close loan as payment for each phase of construction. This is called the draw process.

How does my builder receive funds for construction?

Your builder has received a welcome package from First Horizon Construction Lending. He will be given a cost breakdown form based on the package he submitted to First Horizon. He will also have two forms that will be used each time he makes a draw request. These forms are the Draw Request Form and the All Bills Paid Affidavit. Your builder should only make draw requests for work completed. The Draw Request Form should be completed out for the amount requested and the All Bills Paid Affidavit form must be signed also. The All Bills Paid Affidavit states that the funds will be used to pay all labor and materials for items requested for that draw. It is the policy of First Horizon Construction Lending that the borrower signs the Draw Request Form and All Bills Paid Affidavit along with the builder. This enables you to monitor the funds disbursed to the builder.

Many times, borrowers will sign a form at closing that allows First Horizon Construction Lending to disburse the funds directly to the builder by wire transfer. Some borrowers may receive cashier's checks made payable to both the homeowner and the builder. Regardless of the manner in which your builder receives the construction funds, you must sign each and every draw request made during the construction process. Some exceptions apply.

After First Horizon Construction Lending receive a draw request from your builder, our draw specialist will order an inspection of the property. The draw amount released to your builder will be based on the percentage complete from the line items requested. This draw process takes an average of 72 hours to complete.

There may occasionally be a delay of the disbursement of funds due to special circumstances, such a delays from the inspection company. Please note also that if your interest payment is delinquent (after the 15th of the month), the draw may not be released until said payment is received in our office.

It is mandatory that General Liability and Builder's Risk Insurance be maintained during the construction phase. If, at any time during construction, the required policies expire or cancel, it is the responsibility of the borrower to see that the home is insured with no lapse in coverage.

If, at any time during the building process, any conflicts arise regarding your builder, sub-contractors or suppliers, you should notify First Horizon Construction Lending and your Relationship Manager immediately.

What is a contingency reserve?

A Contingency Reserve may be attached to your construction loan in two ways: as a Builder's Contingency or a Borrower's Contingency. If a builder has incorporated a Builder's Contingency line item in his contract, this would allow him to draw from these funds for cost overruns or other expenses not anticipated. The other manner would be a Borrower's Contingency Reserve, which occurs when your loan amount exceeds the total amount of the transaction. This type of reserve can be used by you for any real estate construction upgrades, overruns, or expenses not anticipated prior to construction - for example, you may decide to add a desk, install a different type of flooring, or upgrade your home's lighting fixtures. A Borrower's Contingency Reserve can only be used by the builder with your written approval. Contingency funds may only be used within the scope of the construction project.

How do I make change orders with my builder?

Change orders should be submitted in conjunction with draw requests. Borrower and builder must both agree and approve any change orders. If a change order involves making changes to the original cost breakdown, First Horizon Construction Lending must first approve the changes. If a change order goes outside of the original scope of the project, the borrower is responsible for these funds separate from loan proceeds. The loan amount cannot be increased to fulfill change orders or any additional costs. Any change order that is to be charged to a contingency reserve account must be requested by the borrower in written form.

Date Down Endorsement - This is ordered by First Horizon Construction Lending from the title company to close out the title policy and insure no additional liens have been filed against the real property during the construction phase. If any liens are discovered, it is the responsibility of the borrower to clear any defects to title prior to modification.

Final Survey - The final survey is usually ordered by the builder but can be ordered through the Title Company or First Horizon Construction Lending. Final surveys may be required in order to assure no encroachments have been made.

Builder Docs - These documents are printed by Construction Lending and faxed to the builder upon final draw request. They contain the Builder's Final Lien Waiver Affidavit, the All Bills Paid Affidavit, and the Certificate of Completion. The builder must sign the Final Lien Waiver Affidavit and All Bills Paid Affidavit and have notarized. The borrower must also sign the All Bills Paid Affidavit and the completion certificate. The Certificate of Completion is signed by the borrower in order that First Horizon Construction Lending has verification from you (the borrower) that the home is 100% complete to your satisfaction. These documents are then faxed to our office and originals can be overnighted or mailed to First Horizon Home Loan Corporation.

Final Inspection (442) - This will be performed by the original appraiser. He must certify that the project is complete based on the plans and specs from which he predicated his original appraisal.

Certificate of Occupancy - This may be provided by you or the builder, although some city or county regulations may not require it.

Well and/or Septic Certification - You may or may not have a well and septic system. If you do have one or both, your builder should be able to supply the certification.

Homeowner's/Hazard Insurance - Once the construction is 100% complete and you have signed the Certificate of Completion, First Horizon Home Loan Corporation requires evidence of a homeowner's policy. The policy must be paid for one year in advance. The policy should be an amount equal to the loan amount, at a minimum.

4. Modification to Permanent Loan

Since your initial closing is the only actual closing required with an OTC Loan, the documents you will sign at modification simply convert your construction loan to a permanent mortgage. This modifies the terms of the loan to align with the actual principal balance. The mortgage loan payment is established based on the type of loan program you have chosen. This is also when your escrow account will be set up (if your loan requires escrows) and a first payment date is established.

Although your builder has completed the project and has received his final draw, the modification process must be completed before you move into your new home. The first thing we will need to know is whether or not you have locked your interest rate for the permanent loan. If you have not done so, please contact you Relationship Manager and discuss your lock The lock will tell out modification desk that particulars of the loan.

Once this has been accomplished the modification specialist will contact you and your Relationship Manager and arrange a time for you to sign the modification documents. There may be funds due at this signing. If you have a Modification Reserve Account, those funds would be used at this time. Some of the expenses involves with this transaction may be: construction interest due to time of signing, pre-paid interest due on the permanent loan, escrow set up (property taxes, insurance, and mortgage insurance), and any shortages in the inspection fees, any unforeseen costs not paid from the initial closing.

Any remaining unused funds in the Interest Reserve may also be used at this time for modification purposes.

Please contact your Relationship Manager with any questions regarding your rate lock or any additional charges that may have occurred during the construction period. If you have any questions regarding your loan during the construction period, the First Horizon Construction Lending office will be glad to answer them for you.

We appreciate your business and are committed to making you home building experience as enjoyable and stress-free as possible.