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Expert
Posts: 1549
  
Location: Southwest Louisiana | And it starts....me and my husbad are wondering how this work - We got a bid from 2 different contractors (we got more, but we're down to these two). One says he can build it for $165,000. We've spent hours with him going over everything and we're all on the same page. The other guy says we can build it for that amount, but we're crazy if we go to the bank with the bid at the actual amount we'll need, because we're screwed if anything runs over cost. He says we should go with a higher big, like around $220,000 to cover our butts. If we can build it for $165,000, great, but at least we'd be ok for the loan and not have to come out of pocket on things that could happen, like if we choose a different stone or tub or whatever. This second guy is actually a really stand up builder who's been in the business for about 20 years and we've known him a ver long time, so we don't feel he's trying to pull anything over on us.
What we're concerned with is the bank - if we go looking for a construction loan for $220,000, they do the appraisal and everything goes through, and at the end of everything, when it's time to close on the loan and roll it into a mortgage, what's going to happen when we've only spent $165,000 of our $220,000 construction loan? |
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 The best bad guy on the internet
Posts: 3519
Location: Arizona | You will have the loan for $220k (if it appraises for that amount), that's what you will make payments based on. I agree with the one builder on taking out a bit more. I'm in the construction business and I see it happen all the time, over budget!! |
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 Accident Prone
Posts: 22277
 
Location: 100 miles from Nowhere, AR | Normally, you draw out of your construction loan as you need it. You don't take the lump sum on the front end. So if your loan is approved for $220,000 and you spend less, it's just money you didn't borrow and that much less you owe. That's also how businesses with a line of credit operate. |
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Expert
Posts: 1549
Location: Southwest Louisiana | Edited because I responsed at the same time....
Yes, the loan we'll get works on a draw system so we take the money in stages and pay the interest of the amounts we take. So we'll just have that left at the end and they'll close the loan using the actual amount used? That'll make me feel a ton better!
Edited by Rocket'sMagicGirl 2014-05-13 12:30 PM
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Accident Prone
Posts: 22277
Location: 100 miles from Nowhere, AR | Rocket'sMagicGirl - 2014-05-13 12:27 PM So if we get a loan for $220,000 and in the end we only actually spend $165,000 total on everything, we'll still end up paying on a $220,000 note, with just the difference in cash sitting around?
No. |
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Accident Prone
Posts: 22277
Location: 100 miles from Nowhere, AR | Rocket'sMagicGirl - 2014-05-13 12:27 PM Edited because I responsed at the same time....
Yes, the loan we'll get works on a draw system so we take the money in stages and pay the interest of the amounts we take. So we'll just have that left at the end and they'll close the loan using the actual amount used? That'll make me feel a ton better!
LOL You edited as I answered. |
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  That's White "Man" to You
Posts: 5515
| You only pay on what you use. If you only use 165K you will pay interest only payment on the disbursed amount during the construction. After construction is finalized you will convert to a long term financing option. That conversion will only take place on what you have used. You will however pay a loan fee on the entire $220K. Which could be an extra $1000 or so. The bank is only going to give you a % of the appraised value. You will probably go over budget and that will come out of your pocket. Most banks also do a 10 % contingency for that same reason. Good luck. |
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Construction loan/mortgage question