Freddie Mac 120-Day Requirement at a Glance:
- Applies to lenders who sell their mortgages to Freddie Mac
- Applies to one-close, construction-permanent loans
- Appraisal update is required if construction is longer than 120 days
If your lender plans on selling your construction-permanent loan on the secondary market, you will have to build your home within 120 days or possibly face an additional appraisal or recertification of value. Freddie Mac and Fannie Mae, the government sponsored entities or GSE’s that absorb the vast majority of home loans on the secondary market, imposed the 120-day deadline on construction-permanent loans in 2009. The requirement is to ensure the home has not lost value during construction. Previously, the rule was 180 days before requiring another appraisal update or completion report.
Lenders say it’s a nuisance more than a real financial worry for many buyers, since home values are remaining stable (or seeing modest gains) in most real estate markets across the U.S. The new rule only applies to lenders who offer one-close, construction-permanent financing, which sell their mortgage portfolios to Freddie Mac or Fannie Mae.
This doesn’t mean you have to build your new dream log and timber home within 120 days. Indeed, since log and timber homes are often custom homes, construction schedules can run from eight to 12 months. Construction schedules that are longer than 120 days will simply require another appraisal update or completion report.
That 120-day deadline starts with the bank’s appraisal of your plans, specifications and building site. If you’re construction schedule is longer than 120-days, you will have to obtain another appraisal at the completion of construction and before your closing. Appraisals typically cost between $400 to $650, says Greg Ebersole, loan production manager at American Log Mortgage.
Your other options include:
• Buyers can choose a bank that does not sell its mortgages to the GSE’s or follow the adopted 120-day re-certification of value.
• Buyers can also opt for a two-close, construction loan and mortgage. If you go for this option, be aware that the permanent loan is a completely separate loan process. It too will need to have an appraisal that is not greater than 120 days old. For example, a home buyer starts with a construction loan May 1st, and the home is finished Nov. 30th. Since the appraisal is now over 120 days old, a new appraisal will need to be performed before closing.
• Or buyers can explore lending options from their local bank, which can elect to keep a mortgage within its own portfolio, instead of selling it on the secondary market. Typically this will mean having to take a adjustable rate versus a fixed rate, says Ebersole with American Log Mortgage.
There are plenty of creative ways to finance a mortgage today. Talk to your bank or lender to find out what your options are.