BANKS -

Construction loans have a higher interest rate than primary home mortgage

TIME IS MONEY

WHEN DOES THE CLOCK START?

If you have a locked in final, permanent interest rate, The bank will give you 12 to 15 months, to finish building your house…If it takes longer, you lose this great rate, and your house payment will float up, to current interest rates…forever..

This mean you pay an extra $100 to $500 a month… for the next 30 years… All because you missed the deadline.

This 12-month clock starts when you sign…

So, make sure your contractor is ready to start too…They might be finishing other houses…and you could lose a couple months, waiting for permits, or demo etc…

What is DONE? According to the banks? When the city gives you an OCCUPANCY PERMIT, a final inspection… AND the bank sends in yet ANOTHER bank appraisal, and HE says you are done. When the bank inspector says you are done, the bank will release the last 10% to 20% of the construction money, and your leverage with your contractor evaporates at that moment…even though there are many things on the “punch list” yet to do.

BANKS ARE CAUTIOUS, FEARFUL PEOPLE

The amount the bank will loan you, depends on both your income… AND the appraisal based on your blueprints, and bid. This appraisal is notorious for being 10% lower than the finished house.

Appraisers are fearful …. So, they lowball a house, so they will not be sued. In the 90’s appraisers were the Wild West…so now banks and appraisers are very gun shy…

Banks are also fearful, so they lowball the appraiser’s lowball, so they will not be left holding the bag.

You are fearful, because your whole future, depends on whether you get a flaky, creepy appraiser….or a professional, intelligent appraiser… (see my essay on appraisers…).

BUT, WAIT, THERE’S MORE

CONSTRUCTION INSURANCE

Finally, after all this cautious paperwork, lasting months and months…the bids, the contractor hunt, the evaluation of your income, you STILL have to secure INSURANCE on the construction job…..!!! You pay an extra $500 to $2000 for a year of construction insurance, even tho the contractor has insurance, and you have house insurance, you have to buy even more insurance… !

More paperwork… more shopping around, more begging…

When the house is finally done…(is is realy EVER done? The bank will send ANOTHER appraiser over…to do a final appraisal…so the bank can release the final money due the contractor….

At this point… you might still have the list of construction flaws, mistakes, jobs not done…the punch list… as it is euphemistically called….

I call it the list of errors, problems, jobs promised, but not done, the clean-up, the doors that don’t open or close..the mountains of cement piles in the back yard, the paint sprayed on your bushes, and roof shingles… you know stuff…

The appraiser does his job all over again…. And eventually the contractor is relieved you actually paid 100% of what is promised…

see my essay on DONE… it is like a stack of cards..

THE PAY OFF, GRAND FINALE

the city signs off,

giving you a occupancy

the bank pays off the contractor

the punch list of errors is combed over till you cannot stand the sight of workers in your life anymore

and now, you have a big empty space… to fill up.

It is not like in TV with all the furniture and paintings and candles glowing….

you are left with your storage room to evacuate and pay off…

your lawn to repair, your windows to clean.. and little by little, it becomes your house…not in one day… but over a few months,…!

you never want to see a contractor again… and never want to see a sub..done and done.. you want you life back, your privacy, your own timeline…not theirs..

not like TV..

RINCE, REPEAT…. REFI AGAIN

If the bank screwed you over with a big interest rate… because they can… you now start all over, and begin the refi of the finished house again… with another appraiser, and 3 more months of paperwork…

SEE… it is not glamourous…

But 2 or 3 years later…you will be grateful, you did it, and love the house you designed so well….pain is forgotten …if you compartmentalize well…

see my experiences…

IN POLITE SOCIETY,

YOU DO NOT TALK ABOUT MONEY

Well, that ends now….you are dealing with the banks……drop your drawers…

They want to see EVERYTING…and they will!

To get a feeling if you are even likely to get a construction loan, you can, and should be absolutely honest with the banks.

You will tell this stranger behind the desk, exactly how much money you have, will have, your income, you work history your debts & credit scores.

You will tell this stranger stuff you never tell your best friend or mother… you just drop’em like in a Doctor’s office, but without a paper robe.

At this point in your 2 years of planning drawing, thinking, you will have “construction ready”

(picture here)

drawings AND the official signed off bid from your contractor…. the bid that you and he/she agree on the price and scope of the job… down to the last details…

You are solidly 2 years into the process now, and ready to see the banks…. there will be 3 people in this unholy alliance now. You, the contractor and the banks.

Banks are Fearful people

Banks work out of fear…

Fear you are broke,

fear you are running a scam on them,

fear you are lying,

fear you are a drug lord laundering money,

fear you are not employed,

fear you are employed…

They ask for 20 documents, and you slam back PDF’s so fast! Taxes, income, banks, IRA, all fresh, with page numbers on the bottom, no screen shots please… and still they ask for more and more.

If the process lasts more than a month or two, they ask for FRESH bank statements, pay stubs, again…

At all times,

you are the criminal,

they are the cops…

you feel dirty, illegal, a suspect the whole time…

So… in your 2 years to draw up your house… get your financial life clean, good credit, steady job, pay off odd debts… just to get the bank loan.

IT ALL BEGINS …WITH A BEAUTIFUL/HANDSOME SMOOTH, CULTURED PERSON AT THE INTAKE DESK…

They hook you into their bank… all will be well.

You think this is your guy/gal…

I can relate with this one… it will all be OK.

But after he/she signs up up…. you are handed over to some guy in the back room, who you never see,

an anonymous clerk in a cubicle,

…just a name and an email and a phone…

and they become your nemesis….for the next few months…months!!!!

THE UNDERWRITER

Everything gets blamed on the UNDERWRITER

…. some anonymous fact checker, that presumes you are a lying crook the whole time….and works up from there.

Banks just say…1000 times…..”well, its up to the underwriter…..”

you never EVER speak/deal/email to an underwriter directly, always 2 degrees of separation from you, and the all powerful UNDERWRITER…

He/she will constantly ask for more and more documents …playing good cop, bad cop… “for the “underwriter”.

The underwriter has no name, no contact, just a man behind the curtain that controls everything.

Every demand of you, every rejection, every “need to know” is “for the underwriter.”

It is a sickening, frustrating process, where you jump when they say jump, and you wait, and wait, and wait. …the process is creepy, and one-sided.

And still, I am 100% perfectly legal, and honest, computer savvy, with great credit, great job, building a great house, in a sterling neighborhood… yet, I feel creepy, suspected, and loathsome the whole time.

No more cultured lady at the front desk…you are dealing with a prison guard mentality now…”Honest… I didn’t do it guard… honestly… I never did it! “

I miss the days when your handshake was your word.

That was an honorable time.

This is not an honorable time….so be prepared to drop your drawers…

This is a hard way to live… and yet…this has nothing to do with the anxiety of actually building a house… this is just the paperwork.

Right up to the day I signed we closing papers… I was never told we won… we were just told to show up at the lawyers’ office on a certain day…to sign papers. There was never a sense of victory, just a 3-month paper shuffle, over and over again… never sure, never confident, always on pins and needles.

I had one of these avoid me, so I brought my mac, to the office, and set up shop to sit in the waiting room all day, till he came out….it was a Friday 2pm …he could not begin his weekend till he saw me. Luckily, I had a thermos of coffee and lots of work to do…so I enjoyed their chairs, and AC, and kept drawing Sketchup drawings indefinitely… till they had to walk out…there was no other entrance/exit. WIN!

Backroom boys….

They are child’s play, till you really face the boogieman…..THE UNDERWRITER…..

_____________________________

____BANKS AND CONSTRUCTION LOANS.

FIRST… Rembember this.

Nobody owes you anything… YOU are the begger. You have to eat it.

While this is a humbling place to be, you have intelligence, logic, and can push back when a bank gives you an unfair appraisal (the most common roadblock to getting a loan…).

Each state, region is different. It will help you immensely to become conversant with terms such as:

Contingency reserves
Construction interest rates
Closing costs
Release of money… the draws & inspections
Interest only payments
Builders insurance
underwriters

Yes, it is a nightmare…It is inside out logic, but you are asking strangers to loan you, a massive amount of money.

You, and the bank will be going way out on a limb… and a lot can go wrong between start & end.

So every contingency, every risk, is pushed back on YOU, the one asking for money… the begger.

However, when it is all over though, YOU the owner, will have a brand-new house, a massive investment, that will go up in price forever after. YOU, not the bank, will profit from this investment… so remember there will be an upside to all this angst, humiliating questions, interrogation, suspicion, and paperwork…. well that is the idea anyway.

The way to not be shocked and insulted by this process, is to study construction loans, and be prepared for what will happen.

While this is all new to you, the banks have done this 1000 times.., they are not your friends, or enemy… It is both very very personal, and also very very cold & objective.

Suck it up, learn as much as you can beforehand, and BE NICE!

You are a human, and so are they.

You have problems, so do they.

Do not yell, or scream, or fight… At the same time, do not take no, or be cowed by bad appraisals, or refusals… think and work the problem, and push back… NICELY. Use your words, letters, and logic… and font 48 once in a while. 

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BANKS

Construction loans… they charge a higher interest rate, of the amount they give to your contractor… 10% at a time, with an initial 10% or 20% to get the contractor started…..seed money for supplies etc.

So the clock is ticking. Also, they offer you a great interest rate, good for 12 months from now……All guaranteed for 12 months….you are new, cute and happy….and say oh, sure it will be done in 12 months…. But, still, you know the clock is ticking…

Then….the cement man does not come for 2 months…. Always he will be there next week…but he has 20 excuses (see pdf…) the men are digging out the dirt…fill a dumpster…and it takes a week for a dumpster to get exchanged…. 10 weeks go on like this… then the rains, the holidays, the birthday, the 80% fo week when no one is at the job…. Because the contractor shifted the workers to some other job……who knows…but it aint you.

Ok, I can barely speak of all this…this is the part all renovators compartmentalize afterwards because the pain, humiliation of beign stood up, the embarrassment as your friends keep asking… you are not done yet? It has been a 18 months now… what is going on? And you have no answers..

Anyway, I digress…. The banks …if you miss your deadline…they don’t care….they will give you a loan at whatever interest rate they want to now…..and your mortgage just went up $200 to $400 a month forever….

Should I have yelled more at the beginning… This is equivalent to a car payment….my car is 25 years old… IT IS MY FAULT……the whole renovation is my fault, using up my family money…..pressure…. yes.

(answer….I refi’d the bank loan with a different bank 1 month after my construction loan ended… so the “mean bank” did all this paperwork, for 1 month of bad interest…hum.. banks…

Since then, I even refi’s the house a second time, since amazingly interest rates went dow.

Time is also an amazing problem….during the construction time…you and your husband must stay heathy…..he must stay employed…your credit must stay good….you cannot run out of money….

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When a bank hires a mortgage loan officer, the face of the bank guy/lady…they hire a Personality plus type.

Mine was a blonde bombshell named Brandy. Not kidding, her name really was Brandy.

She is the one to get you to sign a construction loan (normal mortgage plus 2 or 3%) and commit the next 18 months of your life, and all your money.

BUT…once you sign, you are passed off to an unseen, back-room boy. This guy has no need of looks or personality…. he is a paper pusher.

All day, he pushes papers. So, THIS is who you are now married to.. THIS is who will email you for more and more and more proof you are not a crook, a theif, a lier, a job switcher, proof that your name IS your name. A real bait and switch job….no more Brandi…now you email Dear John.

But if you push back to Dear John….he blames it on the Uber Paper Pusher….THE UNDERWRITER…

Every single insane request is to appease the UNDERWRITER…

You will never meet, see, know, or email this person… He/She is the man behind the curtain….and the curtain is ALWAYS CLOSED.

OK… LETS BEGIN AGAIN…. on a sweeter, lighter note.

The process….

After a 12 to 18 months of hard work,

working with an architect, getting permits, picking a contractor, refining a bid in exquisite detail …THEN…

THEN…..now that you are sooosooo too far down the road…

You get to approach a bank, and ask for a construction loan….

You are now dealing with THE BANK… and the APPRAISER.

BANKS AND CONSTRUCTION LOANS.