Doc. #: WGL900 Last Revised: 03/10/04
The Chevy Chase Bank Construction/Major Home Improvement to Permanent
INFORMATION: Loan is a financing structure that allows consumers to finance the construction of
a new home or the substantial renovation/rehabilitation/improvement of an existing
structure. During the construction phase, the loan is an interest only line of credit
with a variable rate indexed to the prime lending rate or LIBOR. Construction
funds are advanced based on a pre-determined schedule and interest is paid only
on the funds advanced. Upon completion of the construction, the loan converts to
a permanent loan under the terms described below.
¯ The origination guidelines for the Construction/Major Home Improvement Loan
are the same as the guidelines for the Permanent Loan, except where noted
below. Loan limits, LTVs, CLTVs, HCLTVs, loan file documentation, required
borrower contributions and allowable seller contributions are determined by the
guidelines for the permanent loan financing program.
¯ Permanent Loan Program Selection:
1. Upon completion of the construction, the loan converts to the permanent loan.
The loan amount is the unpaid principal balance of the construction loan.
2. The permanent loan must be a CCB Cashflow ARM, 3/semi ARM, or 5/semi
ARM. On the 3/semi and 5/semi ARM products, the construction period is
deducted from the fixed rate period of the ARM. For example, if the
permanent loan is a 5/semi and the construction period concludes after 12
months, the first adjustment for the 5/semi will occur in 48 months.
3. All prepayment penalties are in effect from the date of conversion to
permanent, not from the date of settlement. The fee for not converting to
permanent financing is 3% of the loan amount. In addition, if the borrower
refinances or pays off the loan within 180 days of conversion to a permanent
loan, a pre-payment penalty will be assessed that is the greater of 2% or the
pre-payment penalty on the permanent product. This penalty will be assessed
even if the loan refinances to another CCB product.
LOAN LIMITS: ¯ See permanent loan guidelines for specific loan amounts and the maximum
LTVs/CLTVs/HCLTVs.
¯ LTV calculations are based on the following formulas according to the type of
transaction:
New Construction:
LTV based on lesser of as-complete value or acquisition plus cost.
Major Home Improvement/Rehab:
Purchase Money: LTV based on lesser of as-complete value or acquisition plus
cost.
Refinance: Loan amount based on the sum of the payoff of all existing liens,
renovation costs, contingency costs (if financed), eligible soft costs, and eligible
interest reserve plus closing costs, points and prepaids. This sum may not exceed
the allowable LTV determined by dividing the loan amount by the “as completed”
value.
On all transactions, the following costs may be financed:
§ Construction phase origination points
§ Discount points
Chevy Chase Bank, F.S.B. – Wholesale Lending Division
Loan Origination Guidelines
Construction/Major Home Improvement Lending
Page: 2 of 5
Doc. #: WGL900 Last Revised: 03/10/04
§ Soft construction costs, if the FICO is >700, up to the lesser of 2% of the loan
amount or $5000. These costs include permit fees, architectural fees, etc.
§ Closing costs up to 6% of the loan amount, including prepaids
§ Interest reserve
§ Contingency reserve
¯ Interest Reserve Account: Assets totaling the estimated amount of the interest
payments due during the construction phase must be available if the borrower is
not occupying the property during construction. Financing these payments is
strongly recommended on all new construction loans, all second home loans, and
loans where the renovations are so extensive the property cannot be occupied. If
the value does not allow interest to be financed, or the borrower elects not to
finance interest through a reserve, the borrower must have liquid assets equal to
the amount of required interest reserves. Retirement accounts may not be used to
satisfy this requirement.
The interest reserve is calculated as follows:
Loan Amount multiplied by 60%, multiplied by the start rate on the construction
phase of the loan, divided by 12, and multiplied by the number of months in the
construction term.
Example: $1,000,000
X .60
$600,000
X .0450 (prime rate plus .5%)
$27,000
\ 12 (months)
$ 2,250
X 15 (months in construction term)
$33,750 Required Interest Reserve
¯ Contingency Reserve: A provision for cost overruns is very strongly
recommended as requests for loan amount increases during construction will not
be entertained. The contingency reserve for new construction should be 5% of the
construction contract. A Contingency Reserve is required for all “cost-plus” new
construction contracts and transactions where a construction management
arrangement is used rather than a general contractor. If, at the end of construction,
the contingency reserve has not been used, funds may be paid to the borrower if
the value at completion produces an acceptable LTV. If the contingency reserve is
not supported by value or borrower qualification or the borrower elects not to
establish a reserve, borrower liquid assets in the amount of the Contingency
Reserve must be verified. Again, retirement accounts are not included in the
definition of liquid assets.
¯ Prior Work: Financing of prior work, funded as part of final advance, is allowed.
This includes all amounts approved by CCB for expenses incurred or paid by the
borrower prior to the closing date for labor or materials used to improve the
property to be financed. Only prior work completed within 18 months of closing
date is eligible. All expenses already paid by the borrower to the contractor must
Chevy Chase Bank, F.S.B. – Wholesale Lending Division
Loan Origination Guidelines
Construction/Major Home Improvement Lending
Page: 3 of 5
Doc. #: WGL900 Last Revised: 03/10/04
be documented so that an unconditional lien waiver can be obtained from each
sub-contractor and supplier. The title policy must include an endorsement for prior
work. An additional fee equal to 1% of the amount advanced for prior work is
required.
¯ Land Value: The maximum LTV for land acquisition/refinance is the same as the
overall transaction. Land value is the acquisition cost/purchase price if acquired
within 12 months prior to commencement of work; if >12 months, the appraised
value of the land will be used. The borrower may receive cash-out as part of the
final draw.
SECONDARY ¯ Secondary financing is not permitted during the construction phase. Secondary
FINANCING: financing is allowed as part of the permanent mortgage financing, however, in
accordance with the permanent loan guidelines.
SELLER
CONTRIBUTIONS: ¯ See permanent loan guidelines.
MORTGAGE ¯ Mortgage insurance is required for loans with LTVs in excess of 80%
INSURANCE: from either MGIC or PMI. The required coverage is determined by the permanent
loan guidelines. Certificates must be obtained prior to settlement. Regardless of
whether MI will be required on the permanent loan (secondary financing or
anticipated as-complete LTV below 80%), MI must be obtained on the
construction loan if construction advances will produce a construction loan to value
in excess of 80%. The monthly premiums are based on the entire loan amount.
§ If MI will be required on the permanent loan, no premiums will be due during
the construction phase unless the borrower defaults. MI premiums will be
collected in arrears for the construction phase if a change to the permanent loan
program eliminates the MI requirement on the permanent financing.
§ If MI will not be required on the permanent loan because of secondary
financing or other circumstances, MI premiums will be due during the
construction phase. Lender paid MI is not allowed.
APPRAISAL ¯ Follow permanent loan guidelines. All appraisals that are not conducted by a
REQUIREMENTS: CCB staff appraiser must be submitted to CCB’s Appraisal Department for a desk
review.
PROPERTY ¯ Single-family dwellings only, with properties in Alaska and Hawaii acceptable
REQUIREMENTS: only on a case-by-case basis. Attached single-family dwellings, such as row
houses and townhouses are allowed if not part of a planned unit development
(PUD). Log homes are accepted on a case-by-case basis. Manufactured housing
is not allowed.
UNDERWRITING: ¯ Borrower income, credit and assets must be documented according to the
permanent loan guidelines, except that assets must always be verified.
Chevy Chase Bank, F.S.B. – Wholesale Lending Division
Loan Origination Guidelines
Construction/Major Home Improvement Lending
Page: 4 of 5
Doc. #: WGL900 Last Revised: 03/10/04
¯ Chevy Chase Bank guidelines for stated income and no ratio features must be
followed except where permanent loan investor guidelines for those features are
more restrictive. No income/no asset programs are not allowed.
¯ Debt-to-income ratios: Allowable DIR will be determined by the permanent loan
DIR guidelines. The cost to carry the existing residence may be excluded or offset
as follows:
1. by up to 75% of the potential rental income documented by a marketable rent
letter from an appraiser
2. a non-contingent sales contract
¯ Credit Scores: Follow the permanent loan guidelines (except that a minimum
FICO of 700 is required for financing of project soft costs).
¯ Assets and reserves must be verified in amounts required by the permanent loan
guidelines. In addition, if the borrower or project does not qualify for financing of
the Contingency Reserve and the Interest Reserve, incremental liquid assets (nonretirement
accounts) equal to those amounts must be verified.
Chevy Chase Bank, F.S.B. – Wholesale Lending Division
Loan Origination Guidelines
Construction/Major Home Improvement Lending
Page: 5 of 5
Doc. #: WGL900 Last Revised: 03/10/04
SPECIAL FEATURE – Cross-collateralization of Current Home Equity: This feature allows borrowers to
pledge the equity in their current primary residence in lieu of a cash down payment in a new construction
transaction. The required borrower equity is advanced on the construction line of credit. The borrower
must sell the property and curtail the principal of the construction loan to conform to the permanent loan
guidelines within 90 days of completion of the new construction (and prior to conversion to a permanent
loan). Failure to do so is considered an event of default and financial penalties will be assessed: the
interest rate on the construction loan will increase two (2) percentage points and an extension fee will be
charged on the construction loan.
¯ All permanent loan programs that allow construction to permanent financing structures are available for
this feature. See permanent loan guidelines for new appraisal requirements, if applicable.
¯ The lien securing the cross-collateralization must be in either first or second lien position.
¯ Eligible Properties: Single family primary residences only. Properties located in Alaska, Arkansas,
Hawaii, North Dakota, Texas, West Virginia are not eligible for this feature.
Lendable Equity: The amount of equity that can be collateralized is determined according to the
following tiered criteria:
Properties in Maryland, DC, Virginia, Delaware
90% of first $600,000 in value
70% of next $200,000 in value
50% of next $400,000 in value
30% of next $800,000 in value
0% of value in excess of $2,000,000
Properties in all other eligible states
90% of first $400,000 in value
70% of next $400,000 in value
50% of next $400,000 in value
30% of next $800,000 in value
0% of value in excess of $2,000,000
¯ Appraisal Requirements: All appraisals on properties located outside Maryland, DC, Virginia and
Delaware must be reviewed by the Chevy Chase Bank Appraisal Department. An appraisal must be
obtained on the current residence to document the value – and therefore, the equity.
¯ Required Reserves: Incremental liquid reserves equal to 10% of construction hard costs must be
verified if the LTV on the new property exceeds 85%.
¯ Debt to Income Ratios: Based on the construction loan amount at the construction line interest rate and
may not exceed a total DIR of 50%. (Guidelines for treatment of the current housing expense apply.)
¯ Automated Underwriting/Documentation: Cross-collateralized loans are not eligible to be entered into
DU. These loans must be manually underwritten using documentation levels consistent with CCB portfolio
product documentation requirements.

The construction/perm loan is one loan with two separate phases.

Construction Phase Rate During construction, the borrower pays interest only on funds as they are advanced for completed work. The borrower may choose to have that interest calculated using either:

Prime plus 1% OR LIBOR plus 4%

Prime is the Wall Street Journal Prime Rate, which floats daily. LIBOR is the
London Inter-bank Offered Rate and will be calculated monthly using the 1-month figure available in the Wall Street Journal the first business day after the 25th of the priormonth.

The selection of Prime or LIBOR should be indicated when the loan is registered initially.

Permanent Phase Rate When construction is completed and certain other conditions have been met, the construction loan converts to the permanent phase of the loan. No additional charges are due at the time of conversion and a second settlement does not occur. The interest rate on the permanent loan is determined prior to the loan settlement based on the permanent loan program selected. There is no opportunity to adjust the interest rate or loan program at the conclusion of construction.

The interest-only construction phase runs concurrent with the loan term so that if, for example, the borrower selects a 5/1 ARM and the construction lasts for 1 year, when the loan converts from the construction phase there will be 4 years remaining before the 1st interest rate adjustment.

Once the Bank receives the loan submission package, the credit documents will be reviewed for approval in the normal fashion by the Wholesale Processing Center. At the same time, the construction contract and the builder information will be forwarded to the Construction Lending Department. Loans will be approved subject to an acceptable draw schedule and builder review.

The Construction Lending Department will structure the draw schedule and contact the borrower and builder so that they may review and approve that schedule of advances prior to settlement. They will also review the builder profile, licenses and insurance to determine builder acceptability. When these items have been completed, the Construction Lending Department will consider the conditions for the draw schedule and builder review fulfilled.

Until the draw schedule and builder review conditions have been satisfied, the loan will not be placed in Final Approval status.

Loan Review Process

Loans will not be reviewed if the official submission package is incomplete or the loan has not been properly registered.
Registration
All construction-perm loans must be registered with Chevy Chase Bank via fax
240-497-8312 prior to submission for underwriting review. A copy of the registration must be included in both the original and the copy file.

Questions about the registration process, program selection, locks and completion of forms should be directed to your Account Executive.

Delivery Eligibility
Refer to the guidelines for the permanent loan to determine loan eligibility. Loan limits, LTV, documentation, etc. are determined by the guidelines for the permanent loan financing program. Any construction-perm loan requiring a credit exception should follow the standard credit exception process.

Appraisals
All appraisals must be reviewed by Chevy Chase Bank's Appraisal Department. The appraisal, with plans and specifications, will be sent for review upon receipt of a complete submission.

Submissions
Submit the fully processed credit package to Chevy Chase Bank's Wholesale Underwriting Department for review. The following items must be included or the file will be returned:

• Original file and one copy package
• An "as completed" appraisal
• Plans and specifications
• Construction contract, including cost breakdown
• Completed builder profile (where applicable)
• HUD-1 for lot (where applicable)
• Construction-Permanent Initial TIL
• Builder Profile
• Executed Construction-Permanent Loan Program, Description, Terms & Conditions (disclosure)
• Construction Loan Amount Worksheet

Loan Decisions When the complete file is received, any submission deficiencies will be communicated via fax. Once the underwriting review is completed, the Underwriter will fax approval or request additional information. Note that a loan decision will not be issued until the appraisal review has been completed. Loans cannot be placed in "final approval" status until the loan is locked and all "prior to final approval" conditions have been satisfied.
Builder Review
The Construction Lending Department is responsible for the review of the Builder Profile and checking the builder references and insurance. Unless the builder is already on the Accepted Builder list, the loan will be approved subject to the builder being reviewed and accepted.

Builder Review and Enrollment
Draw Schedules
The draw schedule for the construction-perm loan must be finalized prior to the loan being placed in "final approval" status. The Construction Lending Department will create the draw schedule and review it directly with the builder and borrower to confirm they find it acceptable. Once an agreement has been reached, the "approved draw schedule" condition will be satisfied.
Contract Assignment
At closing, the Bank will require the borrower to assign their interest in all construction contracts, plans and specifications to Chevy Chase Bank. This is accomplished by having the borrower execute an assignment at settlement. The builder must acknowledge the assignment, but since the builder is often not present at the closing, that assignment acknowledgement is obtained outside of closing. This document will be obtained from the builder by the Construction Lending Department as part of their draw schedule review process.

Review Contractor's Consent to Assignment

At Closing At Closing, the borrower will be asked to sign the Construction Loan Agreement, which governs the transaction. Many of the provisions of the Agreement are discussed in the Construction Lending Disclosure provided at application, but there are other provisions that are not. We recommend that the borrower have the opportunity to review the Construction Loan Agreement prior to seeing the document at closing.

Review Sample Construction Loan Agreement

Funds will be advanced at closing, according to the draw schedule, to satisfy any liens on the property and to pay for closing costs if they were financed. After that initial advance of funds, the borrower and builder will have to complete a request for a draw in accordance with the schedule and documentation requirements set forth in their draw schedule. A few days after closing, borrowers will be supplied a kit with instructions about how to request funds.

Converting to a Permanent Loan When construction is complete, and the borrower has supplied the required documentation, the loan will convert from the construction phase to the permanent phase. To complete the conversion, the Bank will require:
• Final inspection that shows all construction work is satisfactorily completed
• Occupancy permit (where issued)
• Final waiver of liens from the contractor
• Homeowner’s insurance policy
• Final survey (where required)
The conversion to a permanent loan does not require another closing and no new documents are required. The loan documents executed at the original closing determine the permanent loan product and rate and cannot be modified at the time of conversion. There is no fee to convert.

Pre-Payment Penalties The construction process is expensive to administer so there are several penalties built into the loan to guard against early pay-offs. Borrowers will be assessed a non-conversion penalty if they fail to convert to the permanent phase of the loan or if they convert to the permanent phase but pay off within 180 days of that conversion. Pre-payment penalties begin at the conversion to the permanent phase of the loan.