Construction loans

[brokfut]

Wife and I are looking to do a construction loan to build a house. Bank is writing the loan at 300K but I think we can do it for 200K. What happens to the left over funds? Does the bank apply them to the principal or do they rewrite the note?
Not happy looking at the ARM the are offering. all input welcomed.

 

[mdhunter61]

We had a 300k construction loan a couple of years ago. The way ours worked, we only paid interest on the money we used, when we used it. If we didnt use all 300k, no interest paid on the unused amount.

 

[npaden]

It's been a while since I did my construction loan, but you generally don't borrow the whole $300,000 up front.

I just set up a checking account at the same bank and would write checks to vendors and suppliers out of the checking account and take draws on the construction note as needed.

If you only spend $200,000 you only spend $200,000.

After the construction is done you will convert the construction note to a mortgage note. I would guess at that time if your appraised value was $300,000 you could borrow up to 80% of that under a conventional mortgage at that time regardless of your actual cost of construction.

 

[BigHornRam]

We had a 300k construction loan a couple of years ago. The way ours worked, we only paid interest on the money we used, when we used it. If we didnt use all 300k, no interest paid on the unused amount.

That is true, but most construction loans also charge an origination fee up front. So a 1% origination fee on 300k would be $3,000.

 

[rjthehunter]

It's been a while since I did my construction loan, but you generally don't borrow the whole $300,000 up front.

I just set up a checking account at the same bank and would write checks to vendors and suppliers out of the checking account and take draws on the construction note as needed.

If you only spend $200,000 you only spend $200,000.

After the construction is done you will convert the construction note to a mortgage note. I would guess at that time if your appraised value was $300,000 you could borrow up to 80% of that under a conventional mortgage at that time regardless of your actual cost of construction.

This is my understanding. During construction, you're only making interest payments on the money spent also correct?

Looking to do something similar within a couple of years.

 

[Gellar]

Our construction loan was a line of credit up to X amount. As I would pay contractors I’d notify the bank, interest only accumulated on the amount we’d spent at the time, not the entire amount we were eligible for. Initially we had 6 months to do our construction loan but that is almost impossible because many contractors wanted 10% to hold a spot or preorder material 8 or 9 months before they could start. Our bank was easy to work with and extended that time. They were also very helpful as the banker deals with people in your situation every day. He would look at our plan and say we needed to budget more here and here and we could get by with less here. In the end they will convert your construction loan to a traditional mortgage and your banker will walk you through those steps too.

 

[npaden]

This is my understanding. During construction, you're only making interest payments on the money spent also correct?

Looking to do something similar within a couple of years.

Yes. I think they just added the interest to the note on mine. They make you carry insurance on the construction site as well and that goes into the note.

 

[Gellar]

If I remember correctly the bank had an appraisal done based on the plans before the construction loan and after the construction was complete. In our case we got in right in time and the values of homes skyrocketed before the final appraisal was complete.

 

[Doublecluck]

You don’t pay interest on the part you don’t use. Usually just convert it to a fixed rate mortgage when the homes complete. Some construction loans can “roll” in to fixed rate mortgages supposedly but when I was exploring them the rates were about 1/2 percent higher from local banks than what my broker could get me. I was gonna use a construction loan to build but didn’t want to be beholden to the bank, ultimately took out a 80%ltv loan on the property since we owned it. We also had about 100k on hand. Built a 2290 sq ft home and came out in the mid 200’s. That’s with me doing everything inside from drywall on. That was when lumber was higher.

 

[Mallardsx2]

Are they making you do separate closings? I was lucky and only had to do 1 closing.

I just heard that banks are requiring separate closings for const loans and mortgages now.

 

[Sandbrew]

If you think it will only cost $200K it won't. $200K with a $100K cushion = $300K so I'd say about right.

 

[Gellar]

If you think it will only cost $200K it won't. $200K with a $100K cushion = $300K so I'd say about right.

I remember crunching the numbers of what we had used in our construction loan and what we still had to pay and we were going to be over by about 20K. I was a nervous wreck before I went into the bank trying to figure out where we were going to cut things out and/or who I wasn't going to pay. The banker had the paperwork filled out for the extra money so fast it was scary. He said it happens almost every time.

 

[Addicting]

Know what your costs are. We almost did one and they wanted 20% to sign on the loan. They expected us to show up with 60k to deposit it in escrow on the day we signed for the loan.

Had no idea till the day prior and that killed a lot of hard work. The money we had saved was meant to be used to help build and furnish the house. Had no idea they wanted it locked up in escrow.

 

[SilentBirdHunter]

Know what your costs are. We almost did one and they wanted 20% to sign on the loan. They expected us to show up with 60k to deposit it in escrow on the day we signed for the loan.

Had no idea till the day prior and that killed a lot of hard work. The money we had saved was meant to be used to help build and furnish the house. Had no idea they wanted it locked up in escrow.

20% in escrow is high relative to typical home mortgage escrow percent

 

[Addicting]

20% in escrow is high relative to typical home mortgage escrow percent

That is why we walked away from it. Cost us just over 1500 in house plans and fees. We ended up buying and remodeling verses building. Which, in the end, saved us a lot of money for a nicer place.

 

[Pagosa]

You don’t pay interest on the part you don’t use. Usually just convert it to a fixed rate mortgage when the homes complete. Some construction loans can “roll” in to fixed rate mortgages supposedly but when I was exploring them the rates were about 1/2 percent higher from local banks than what my broker could get me. I was gonna use a construction loan to build but didn’t want to be beholden to the bank, ultimately took out a 80%ltv loan on the property since we owned it. We also had about 100k on hand. Built a 2290 sq ft home and came out in the mid 200’s. That’s with me doing everything inside from drywall on. That was when lumber was higher.

Question, Did the bank loan the 100k (80% Ltv ) just on the land? Or did you already have a portion of the house constructed? Thanks

 

[Pagosa]

Know what your costs are. We almost did one and they wanted 20% to sign on the loan. They expected us to show up with 60k to deposit it in escrow on the day we signed for the loan.

Had no idea till the day prior and that killed a lot of hard work. The money we had saved was meant to be used to help build and furnish the house. Had no idea they wanted it locked up in escrow.

So if your house was going to cost 200k and you had a 100k down payment and needed to borrow another 100k, the bank would want 20k in an escrow account until the house was built and it rolled over to a conventional loan? And you wouldn’t be able to use this 20k until after the house was constructed? Just trying to understand the process. Thanks

 

[Doublecluck]

Question, Did the bank loan the 100k (80% Ltv ) just on the land? Or did you already have a portion of the house constructed? Thanks

Just the land, 3 acres we bought for 60 in mid 2020 and it appraised for 140k by June of 22 when we started the build. Only improvement was having the septic in, foundation was poured but not considered in the appraised value.

 

[brymoore]

Construction loans are based on LTV of the appraisal and the approved term loan amount.

You’ll have to make draws on the line to pay contractors. The bank will want backup paperwork to support the withdrawals. You can’t go buy a car.

Interest is a draw expense each month paid by the construction loan.

Once you have an occupancy permit, you can get a term loan to pay off the construction loan. The term loan is usually approved when the construction loan is approved.

Banks have moved away from approving construction loans for individuals to GC their own builds. You might need to shop around to find a bank to do it.

 

[Addicting]

So if your house was going to cost 200k and you had a 100k down payment and needed to borrow another 100k, the bank would want 20k in an escrow account until the house was built and it rolled over to a conventional loan? And you wouldn’t be able to use this 20k until after the house was constructed? Just trying to understand the process. Thanks

We owned the land already and the build was expected to be around 230k. On the lenders advice we applied for a 300k loan and it was preapproved on our credit. Then we went thru all of the hoops with the plans and appraisals. The house appraised fine and with the equity of the land we were fine on a conventional mortgage without PMI. So we shouldn’t have had to take anything to closing besides our deed for them to tie together.

That day prior they called us to let us know what to bring and how much. We were months into this at that point and it was the first we had heard of it. In case we went over budget they wanted 20% locked up to cover the mortgage if it went over appraisal. As the house had to be finished with an occupancy permit prior to conversion to a mortgage. It has to convert to a mortgage to tie the land to the loan thru the title. They had several fail to make that mark and they were left with a legal mess of putting a lien on property. So I guess an insurance policy for them is the best way to say it.