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O/T Construction Loan

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Old 04-16-2004, 08:05 AM
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Unhappy O/T Construction Loan

Anybody with any experience with this please chime in....deal is fixing to go down and need some advice. Bank is basically loaning us the max, now granted there's no way I can afford what they are lending......it's just too much.

Should I make them lower the construction loan to
where I feel comfortablle? Our builder is basically telling us to leave it because once we close on the house, thats what I'll need to be worried about. My builder geverally builds under his estimates, he puts the max he'll spend on the cost breakdown so the bank will approve the most.

Basically there's a magic figure I'm looking ot stay at and don't know if I should be worried about this now....or just take it slow and make sure we don't go overboard with fixtures, etc that really add the cost up.
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Old 04-16-2004, 09:24 AM
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Always try to keep 10-15% in reserve for "while we're at it's" and "I never thought of that's". There are a lot of little costs with a new home that are not included in the builders price. If you are able to draw on the construction loan to cover those costs, you'd be able to use the money. If not, then you are just paying interest on money you won't use.

The fixtures can be an expensive item. I presume that he's giving you an allowance. When it comes time to shop, don't treat that allowance as free money. Remember, that "it's just a little bit more" will add up to be $10,000 in overages. Often these builder like to price entry level fixtures (moen, price pfister, etc) to make their bid look good. There another places where overages can easily occur. Landscaping, well, septic, utilities, finishes, exterior painting, roofing, windows, etc. Hopefully you made all these selections before signing the contract so you have a dead on price. If not, then you can count on some more overages.
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Old 04-16-2004, 09:34 AM
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Hammer, if I understand your question.

The bank should be loaning you only what you need.....well 'might need'.

Say your builder says 100k - on the high side to build and you get a 100k max loan. I assume you will be paying your builder in monthly, phased of some other schedule of periodical payments. Lets say monthly - He will turn in 6 draws to you for 15k each and the job is done for 90k total. That first month you should only be paying interest on that first 15k, second month - you pay interest on 30k(first and second months draw) so forth and so on.....

You get done and you might have had a 100K loan approval but only had a 90K note.

Did that answer your question?
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Old 04-16-2004, 10:13 AM
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yeah I understand.

Basically on the construction loan he maxed it out so we'd get the most off the appraisal because we'll only get 80% of that in the actual construction loan. Lets say I'm approved for 288K well I can't really afford and I've set in my mind that 250K is our tops to spend on the house......so I'm wondering if I need to tell the bank to only do it for 250 or leave it at the full 288 and just play it safe and make sure I'm watching very closly to keep the costs down and stay within my budjet.
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Old 04-16-2004, 10:15 AM
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I can help with this if needed, Rebar, how is your loan doing, make sure you call me if there are problems and I will fix them from here. I can walk you thru the entire process. Also on the loan size, you only draw what you need so they could give you a million dollars and it will never be drawn so never owed. Keep it up there, it will cost you nothing and if it has to be increased later they will charge you for the increase. You will pay interest only on the amount drawn. If there are any points being paid the higher loan amount will make them cost more and Title Ins will be based on the Mrtg amount. That is not so bad, the points could be though. You can call me at 616-886-0077 with any ?s. It is an easy explanation so don't hesitate to call.
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Old 04-16-2004, 10:33 AM
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ahhhhhhh ok gotcha Mitch....completely understand now. My builder on all hisi houses posts payments on Thursdays...so each thursday I'll have recipts on all the work done...plus the bank contacts me each time, the builder can't just draw whatever he wants out. He also told me we'll build it way under as long as I don't get crazy with fixtures and other stuff that adds up.


He's given me a list of people that he uses locally for all this....we've been to some and gotten quotes. I've found on some I can get stuff off the net cheaper so I think we'll just order some stuff and save a little in the process.
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Old 04-16-2004, 08:57 PM
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Wife and I built a house last year. We used a construction loan through bank of America. At closing they gave the builder 10% down (which was our down payment). To get the next draw he needed to complete a certain percentage of the work. A inspector hired by the bank would come by before each draw. When the house was finally done and he securred the certificate of occupancy he got the rest of the money.


With that said, we had to come up with all kinds of money for the little stuff. We lived next door to where the house was being built and went in every day suggesting little changes which were outside of the contract. Builder had no problem with that, we just needed to pay him the difference between his cost and the upgrade (try and find someone that does "at cost" upgrades!) After the certificate of occupancy was issued we had to pay an extra couple thousand for cost overruns with the plumping and electric (more options -- jacuzzi tub, recessed lighting, upgraded appliances, etc). So that worked out. Bottom line is have some extra dough for stuff you didn't know you needed.


In terms of the construction loan, well that worked out very well. We only paid interest on the money that had been paid to the builder...so the payments started out small and became larger as the draws were taken. Since we paid 10% down in cash we didn't see a bill from the bank for two months after closing. Also, since we lived on the property where the house was being built we did have to pay property taxes every month. Insurance for the construction period is built into the construction loan cost and it is minimal compared to a full year policy. So, bottom line is that monthly cost to the bank during the construction period are not close to a full mortgage payment every month, or that is how it worked out for us.

After the house was built interest rates plummeted and we refinanced through a different bank.

Building a house was quite a project. There was always something to do. We filed for our own permits and researched everything (light fixtures, kitchen cabinets, countertops, carpets, floors, showers, tile floors, dimmer switches, door knobs, door locks, windows, doors, siding, shingles, A/C and heat systems etc). We found out real quick to shop around, especially when it comes to the kitchen and floors. We saved at least $10K on wood floors and probably $5K in the kitchen. You can also go nuts with facets and fixtures. I never knew that I needed a $500 facet. After convinving the wife to return to reality we picked out decent fixtures from Home Depot. Granite counter tops will cause the heart to stop, we didn't get those. I'd rather put that money in the bank for a new outdrive. Anyway, the house project is done thank goodness. Good luck with your project.

One final bit of advice...make sure the work is 100% complete (including county inspections, etc) before paying the bill. That is the way the bank issues its draws and the way that we paid for the extras.

Last edited by chuck21401; 04-16-2004 at 09:04 PM.
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