Understanding Construction Loans to Help You Build With Confidence, Part II

This is the second article in our two-part series on understanding construction loans. To read the first article, click here.

At Saco & Biddeford Savings Institution (SBSI), we offer flexible and comprehensive construction loan solutions designed to meet the needs of both borrowers and builders. Below is an outline of our general terms, process requirements, and important considerations to help you understand how our construction loans work.

General Construction Loan Terms

• Construction Phase Duration: Our construction loans include a 12-month, interest-only phase. During this time, monthly payments are based solely on the outstanding balance. If your project completes early, you may request a transition to principal and interest (P&I) payments.
• Extension Policy: If construction is not completed by the end of the 12-month term, remaining loan funds will be placed in escrow, and the loan will automatically convert to P&I payments.
• Single Closing Option: SBSI offers a single-closing construction loan, which transitions seamlessly into permanent financing upon completion.
• Interest Rate Structure: The loan’s interest rate — whether fixed or adjustable — remains consistent from closing through conversion.

Adjustable-Rate Mortgage (ARM) Options
 

• 3/1 ARM: Includes 1 year of interest-only payments, followed by 2 years of fixed-rate P&I before the first adjustment.
• 5/1 ARM: Offers 1 year of interest-only payments and 4 years of fixed-rate P&I before adjustment.

Tax & Insurance Escrows
 

• Escrows are not collected during the interest-only phase.
• They may be added upon conversion to P&I once:
  • Construction is complete.
  • The municipality has issued a full tax assessment.
• The borrower will be responsible for funding the first full payment and a two-month cushion.

Construction Loan Requirements

Documentation:

• Both the borrower and builder must review and understand the construction loan agreement.
• Builders are required to submit a completed budget using the approved SBSI format.
• Principal reductions are not permitted during the interest-only period

Contract & Builder Guidelines
 

• Builder Requirements:
  • A licensed General Contractor (GC) is required—owner-builders are not permitted.
  • Acceptable contract types include fixed-price or “cost not to exceed” contracts; cost-plus contracts are generally not accepted.
• Contract & Plan Requirements:
  • All contracts must be reviewed by our Bank Attorney to ensure compliance with Maine Attorney General requirements.
  • Final construction plans, specifications, and materials lists must be initialed on every page by both the borrower(s) and the GC.
  • Any changes post-approval must follow SBSI’s change order policy.
• Escrow Management:
  • The full construction budget will be held in escrow.
  • The borrower must contribute any shortfall not covered by the loan amount at closing.
  • Escrow balances must never fall below the amount required to complete the project.
• Deposits & Draws:
  • SBSI does not advance deposits from escrow. Personal advances are discouraged.
  • Disbursements are only made for completed work or delivered materials.

Construction Loan Administration
 

• Construction Services Consultant:
  • SBSI will assign a third-party consultant to review all documentation and provide a feasibility report.
  • A mandatory pre-construction meeting will be coordinated among the consultant, builder, and borrower (in-person, phone, or Zoom).
  • The consultant is the primary contact for inspections and draw requests but does not oversee workmanship quality.
•  Administrative Fees:
  • Construction Administration Fee: $1,500 (due at closing).
  • Draw Inspection Fee: $325 per draw (deducted from each draw).
    • Fees may vary depending on loan size, property location (e.g., island properties), or uniqueness.
  • Most projects require approximately six draws. Additional draw fees apply if exceeded.

Draw Process
 

• Draw Request Steps:
  • The GC and borrower complete the draw request form.
  • The GC submits the borrower-approved request to the consultant.
  • SBSI disburses funds based on the consultant's inspection and recommendation.
  • All prior subcontractor lien waivers must be submitted before each draw is released.
  • Draws cannot proceed until a Mortgage Loan Inspection Plan (MLIP) confirms proper foundation placement.
  • Borrowers/builders must notify SBSI before framing or additional foundation work begins.

Completion & Conversion

Upon project completion, the following must be provided to finalize the conversion:

1. Certificate of Occupancy.
2. Signed and notarized Owner/Contractor Affidavit.
3. Final inspection approval by both consultant and appraiser.
4. All outstanding lien waivers.
5. Final interest-only bill (covering the last 30 days).
6. Completion of remaining seasonal tasks (e.g., loaming, seeding), for which funds may be retained.

Borrowers may either continue interest-only payments for the remaining construction term or convert to P&I payments based on the original loan terms.

Disclosures
 

• The Construction Consultant is retained by SBSI and does not represent the borrower.
• The borrower is responsible for overseeing the construction project, including managing the builder, timeline, and adherence to contract specifications.

If you have further questions, please reach out to a SBSI Loan Officer. We’re here to help guide you every step of the way through your construction financing process.