Q: How does the creditor disclose construction costs? (Comment app D-7.vi)
A: Construction costs are costs for improvement that the consumer contracts for to be made to the property in connection with the financing transaction and that will be paid in whole or in part with loan proceeds. For example, construction costs include the portion of a construction loan’s proceeds that is placed in a reserve or other account at consummation. The portion of the proceeds that is held in such an account is sometimes referred to as a “construction holdback.”
For a construction-permanent loan disclosed as either a single transaction or as two separate transactions, the creditor discloses the costs as follows:
Loan Estimate. On the Loan Estimate, the creditor factors the construction costs into the funds for borrower calculation in the Calculating Cash to Close table. They are included as part of the existing debt in the calculation. (§ 1026.37(h)(1)(iii) and (h)(1)(v)).
Closing Disclosure. On the Closing Disclosure, the creditor also factors the construction costs into the funds for borrower calculation. They are included as part of the existing debt in the calculation. They are also disclosed in the Summaries of Transactions table. (§ 1026.38(i)(4), (i)(6), and (j)(1)(v))
If the creditor is using the optional alternative Loan Estimate and alternative Closing Disclosure, for example for a subordinate-lien loan, these costs are factored into the Payoffs and Payments calculations and disclosures. (§§ 1026.37(h)(2)(iii) and 1026.38(t)(5)(vii)(B))
Construction holdbacks can be disclosed separately from the other construction costs in the Summaries of Transaction table or in the Payoffs and Payments calculations and disclosures. If the creditor chooses to disclose the construction holdbacks separately, it can disclose the amount as a separate itemized cost in the same manner as the other construction costs discussed above, and would exclude the construction holdback amount from the balance of the construction costs to avoid double-counting. The amount must be labeled in a clear and conspicuous manner to make clear it is for construction holdbacks. (Comment app D-7.vi.D)