Residential Construction Issues in Connecticut

Are you in this midst of a construction project or just thinking about one? Is your contractor licensed? Does the construction contract contain all of the information required by Connecticut state law? With all of the construction going on in Fairfield County, it is important for you to review these issues to make sure that you, the homeowner, are protected in the event your project turns sour.

In Connecticut, both new home builders and home improvement contractors must be licensed. There are separate and distinct licenses for each and both are licensed by the Department of Consumer Protection (“DCP”). Holding either license, however, does not mean that the builder/contractor has done anything more than fill out the proper paperwork and pay the required fees. The license is not an endorsement by the DCP that the builder or contractor does good work or maintains appropriate insurance. According to the DCP, the definition of a “Home Improvement” is “any permanent change to residential property, including but not limited to driveways, swimming pools, porches, garages, roofs, siding, insulation, solar energy systems, flooring, patios, landscaping, painting, radon mitigation, residential underground oil tank removals, fences, doors, windows and waterproofing, unless the work contracted for is worth less than $200.00.” A “New Home Construction Contractor” is any person or business who builds speculative housing or contracts with a consumer to construct or sell a new home or builds any portion of a new home prior to occupancy.

To check if your new home builder or renovation contractor is licensed, you can go to DCP’s web site at http://www.ct.gov/dcp and click on the Home Improvement tab. A major benefit of using a registered new home builder or renovation contractor is that DCP administers the “New Home Construction Guaranty Fund” and the “Home Improvement Guaranty Fund.” These funds are available to reimburse consumers who are unable to collect for loss or damage suffered from a registered contractor’s failure to perform under a contract. The maximum recovery from the Home Improvement Guaranty Fund is $15,000.00 and $30,000.00 from the New Home Construction Guaranty Fund. There are specific requirements for collecting from each of the funds and you should contact DCP or an attorney knowledgeable in construction law to make sure that you fully comply with all of the requirements.

Once you determine that your home improvement contractor is licensed, you must make sure that the contract contains all of the required information. Connecticut law requires the following of a home improvement contract: (1) It must be in writing, including all changes and modifications; (2) It must include four dates: the date the contract is signed, the date the work will begin, the date by which the work will be completed, and the date by which the homeowner may cancel the transaction; (3) It must include a Notice of the Customer’s Right to Cancel within three business days after signing the contract. The Notice must be attached to and made part of the contract, and must be in duplicate; (4) The notice contained in the contract must be near the customer’s signature and in substantially the following form: “You the buyer may cancel this transaction at any time prior to midnight on the third business day after the date of this transaction. See the attached notice of cancellation for an explanation of this right.” NOTE: Saturday is a legal business day in Connecticut; (5) Both the contractor and customer must sign and date the contract; (6) Contractor must give customer a completed copy of the contract to keep; (7) The contract must be entered into by a registered contractor or salesperson; and (8) It must contain the name and address of the contractor.

If you are building a new home, once you determine that your new home contractor is licensed, you should make sure that the contract contains all of the required information. The new home contract must contain a provision advising you that you may be contacted by the contractor’s other prospective customers concerning the quality and timeliness of the contractor’s new home construction work. You then may advise the contractor in writing upon execution of the contract that you do not wish to be contacted.

If your contractor refuses to enter into a contract that complies with the necessary requirements, you should seek another contractor.

It is recommended that you do not give your contractor cash advances or large up-front payments. You and your contractor should agree on a payment schedule that roughly follows the progress of the work (i.e. - 20 percent progress payments each time the job reaches pre-determined levels of completion). It is never advisable to provide the final payment until the job is complete.

Finally, Connecticut law provides for certain express and implied warranties for new home construction. You should contact DCP or an attorney knowledgeable in construction law if you have a new home warranty issue.

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Residential Construction Term Dictionary

When you start shopping for a new home, you may encounter some words and terms with which you are unfamiliar. The following glossary will help you to be a better informed shopper.

Adjustable Rate Mortgage (ARM) - A loan whose interest rate is adjusted according to movements in the financial market.

Amortization - A payment plan by which a borrower reduces a debt gradually through monthly payments of principal and interest.

Annual Percentage Rate (APR) - The annual cost off credit over the life of a loan, including interest, service charges, points, loan fees, mortgage insurance, and other items.

Appraisal - An evaluation to determine what a piece of property would sell for in the marketplace.

Appreciation - The increase in the value of a property.

Assessment - A tax levied on a property or a value placed on the worth of property by a taxing authority.

Assumption - A transaction allowing the buyer of a home to assume responsibility for an existing loan on the home instead of getting a new loan.

Balloon - A loan which has a series of monthly payments (often for 5 years or less) with the remaining balance due in a large lump sum payment at the end.

Binder - A receipt for a deposit paid to secure the right to purchase a home at terms agreed upon by the buyer and seller.

Buydown - A subsidy (usually paid by a builder or developer) to reduce the monthly payments on a mortgage loan.

Cap - A limit to the amount an interest rate or a monthly payment can increase for an adjustable rate loan either during an adjustment period or over the life of the loan.

Certificate of Occupancy - A document from an official agency stating that the property meets the requirements of local codes, ordinances, and regulations.

Closing - A meeting to sign documents which transfer property from a seller to a buyer. (Also called settlement)

Closing Costs - Charges paid at settlement for obtaining a mortgage loan and transferring real estate title.

Conditions, Covenants, and Restrictions (CC and Rs) - The standards that define how a property may be used and the protections the developer has made for the benefit of all owners in a subdivision.

Condominium - A home in a multi-unit complex; each purchaser owns an individual unit, and all the purchasers jointly own the common areas, such as the surrounding land, hallways, etc.

Conventional Loan - A mortgage loan not insured by a government agency (such as FHA or VA).

Convertibility - The ability to change a loan from an adjustable rate schedule to a fixed rate schedule.

Cooperative - A form of ownership in a multi-unit complex; the purchasers own shares of the entire complex rather than owning individual units.

Credit Rating - A report ordered by a lender from a credit bureau to determine if the borrower is a good credit risk.

Default - A breach of a mortgage contract (such as not making monthly payments).

Density - The number of homes built on a particular acre of land. Allowable densities are usually determined by local jurisdictions.

Downpayment - The difference between the sales price and the mortgage amount on a home. The downpayment is usually paid at closing.

Due-on-Sale - A clause in a mortgage contract requiring the borrower to pay the entire outstanding balance upon sale or transfer of the property. A mortgage with a due-on-sale clause is not assumable.

Earnest Money - A sum paid to the seller to show that a potential purchaser is serious about buying.

Easement - Right-of-way granted to a person or company authorizing access to the owner?s land; for example, a utility company may be grated an easement to install pipes or wires. An owner may voluntarily grant an easement, or in some cases, be compelled to grant one by a local jurisdiction.

Equity - The difference between the value of a home and what is owed on it.

Escrow - The handling of funds or documents by a third party on behalf of the buyer and/or seller.

Federal Housing Administration (FHA) - A federal agency which insures mortgages that have lower downpayment requirements than conventional loans.

Fixed Rate Mortgage - A mortgage whose interest rate remains constant over the life of the loan. The payments are not necessarily level. (See Graduated Payment Mortgage and Growing Equity Mortgage).

Fixed Schedule Mortgage - A mortgage whose payment schedule for the life of the loan is established at closing. The payments and interest rate are not necessarily level.

Graduated Payment Mortgage (GPM) - A fixed-rate, fixed-schedule loan which starts with lower payments than a level payment loan; the payments rise annually over the first 5 to 10 years and then remain constant for the remainder of the loan. GPMs involve negative amortization.

Growing Equity Mortgage (Rapid Payoff Mortgage) - A fixed-rate, fixed-schedule loan which starts with the same payments as a level payment loan; the payments rise annually, with the entire increase being used to reduce the outstanding balance. No negative amortization occurs, and the increase in payments may enable the borrower to pay off a 30-year loan in 15 to 20 years, or less.

Hazard Insurance - Protection against damage caused by fire, windstorm, or other common hazards. Many lenders require borrowers to carry it in an amount at least equal to the mortgage.

Housing Finance Agency - A state agency which offers a limited amount of below-market-rate home financing for low-and moderate-income households.

Index - The interest rate or adjustment standard which determines the changes in monthly payments for an adjustable rate loan.

Infrastructure - The public facilities and services needed to support residential development, including highways, bridges, schools, and sewer and water systems

Interest - The cost paid to a lender for the use of borrowed money.

Joint Tenancy - A form of ownership by which the tenants own a property equally. If one dies, the other would automatically inherit the entire property.

Level Payment Mortgage - A mortgage whose payments are identical for each month over the life of the loan.

Mortgage Broker - A broker who represents numerous lenders and helps consumers find affordable mortgages; the broker charges a fee only if the consumer finds a loan.

Mortgage Commitment - A formal written communication by a lender, agreeing to make a mortgage loan on a specific property, specifying the loan amount, length of time and conditions.

Mortgage Company (Mortgage Banker) - A company that borrows money from a bank, lends it to consumers who want to buy homes, then sells the loans to investors.

Mortgagee - The lender who makes a mortgage loan.

Mortgage Loan - A contract in which the borrower?s property is pledged a s collateral and which can be repaid in installments over a long period. The mortgagor (buyer) promises to repay principal and interest, to keep the home insured, to pay all taxes, and to keep the property in good condition.

Mortgage Origination Fee - A charge by a lender for the work involved in preparing and servicing a mortgage application (usually 1 percent of the loan amount).

Negative Amortization - An increase in the outstanding balance of a loan when a monthly payment is not large enough to cover all of the interest due.

Note - A formal document showing the existence of a debt and stating the terms of repayment.

PITI - Principal, interest, taxes, and insurance (the 4 major components of monthly housing payments).

Point - A charge of 1 percent of the mortgage amount. Points are a one-time charge assessed by the lender at closing to increase the interest yield on a mortgage loan.

Prepayment - Payment of all or part of a debt prior to its maturity.

Principal - The amount borrowed in a loan, excluding interest and other charges.

Property Survey - A survey to determine the boundaries of your property. The cost will depend on the complexity of the survey.

Rapid Payoff Mortgage - (See Growing Equity Mortgage).

Recording Fee - A charge for recording the transfer of a property, paid to a city, county, or other appropriate branch of government.

Real Estate Settlement Procedures Act (RESPA) - A federal law requiring lenders to provide home buyers with information about known or estimated settlement costs. The act also regulates other aspects of settlement procedures.

R-Value - The resistance of insulation material (including windows) to heat passing through it. The higher the number, the greater the insulating value.

Sales Contract - A contract between a buyer and seller which should explain, in detail, exactly what the purchase includes, what guarantees there are, when the buyer can move in, what the closing costs are, and what recourse the parties have if the contract is not fulfilled or if the buyer cannot get a mortgage commitment at the agreed-upon terms.

Settlement - (See Closing).

Shared Appreciation Mortgage - A loan in which partners agree to share specified portions of the downpayment, monthly payment, and appreciation.

Tenancy in Common - A form of ownership in which the tenants own separate but equal parts. To inherit the property, a surviving tenant would either have to be mentioned in the will or, in the absence of a will, be eligible through state inheritance laws.

Title - Evidence (usually in the form of a certificate or deed) of a person?s legal right to ownership of a property.

Transfer Taxes - Taxes levied on the transfer of property or on real estate loans by state and/or local jurisdictions.

Veterans Administration (VA) - A federal agency which insures mortgage loans with very liberal downpayment requirements for honorably discharged veterans and their surviving spouses.

Walk-Through - A final inspection of a home before settlement to search for problems that need to be corrected before ownership changes hands.

Warranty - A promise, either written or implied, that the material and workmanship of a product is defect-free or will meet a specified level of performance over a specified period of time. Written warranties on new homes are either backed by insurance companies or by the builders themselves.

Zoning - Regulations established by local governments regarding the location, height, and use for any given piece of property within a specific area.

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