I wanna pull money outta this ATM just cuz its so cute!

You have  property and you have construction documents.  You give a set of the plans to the loan officer and the bank will get an appraisal of what the property will be worth with the new addition/house.  You also commit to a certain standard of ‘finishes’, i.e. granite, Corian or Formica countertops?  Tile floors or hardwood or Pergo?  Bosch appliances or GE? 

 The bank will review that appraisal and determine how much loan-to-value exists.  Loan-to-value is the mortgage (financing the property and the loan) divided by the appraised value of the property.  If the value isn’t high enough for the bank, they might ask you to increase your equity in the property by way of throwing cold, hard cash at it assuring them that you have a vested interest in the success of the project – i.e. you won’t walk away when the going gets tough.

I’m not going to go into detail about percentages and amounts and all that (your cue to say ‘thank heaven!’).  There are many different types of loan packages based on the amount of the loan and your FICO score – too many to go over here.

OK, banks also look for a loan-to-cost value – what they will fund and what the project will cost.  They will loan you a percentage of that value.  There is a gap between what the bank will loan and what the project really costs.  YOU must have the funds set aside to fill that gap, plus any cost overruns.  PLUS any cost overruns, ya feel me?

Gotta have a better contingency plan than this!

The bank might assume your current mortgage plus the construction loan and then expect you to refinance when the project is complete. 

Generally, the bank wants the building permit issued prior to issuing the loan.  That means money out of your pocket, although it will be paid back once the loan funds.

 Now, the loan documents are signed, shaking of hands all around.  The bank will fund the loan into an account with your name on it. 

 The bank will give you money from that account based on your ‘draw request’.  Our bank had a form we filled out listing each account line item, what or who the money was for and the amount requested.  There are different processes including online requests so your bank might be different.  You are ‘drawing’ money from the account and you pay interest on that money.  These interest/monthly payments for the loan are taken from a special reserve account each month; you don’t pay for them out of your own pocket.

The first thing you’ll do is figure out what items constitute your first draw of funds from the bank.  You should repay yourself the money you have fronted the project with up to now:  Architectural fees, plan check and permit fees, fees for reports and consultants and the contractor’s retainer.  You did remember to add all those items to your construction costs, didn’t you?

 Then you’ll determine which contractors/subcontractors need to be paid soonest and what products need to be purchased…for instance, you are having your cabinets built by Three Trees Woodshop and you need to give Doug a retainer and a payment towards the purchase of the wood and you are going to have John Joy Studios begin creating the stained glass windows so John needs a retainer.  You’ll list those items on the funds request.

 The bank will send you a check and you will deposit it into your construction account.  Yes, you should create a special checking account for this money.  Getting project money mixed up with your personal funds is a nightmare you don’t want to have, so do what I tell you.

Don't let your files look like this!

You will then write checks as required and provide a copy of the check to your loan officer as proof of payment.

 It’s important to have invoices and copies of checks to provide to the bank.  They get antsy if they think you aren’t as good at record-keeping as they are.  If you squander the money, they get stuck with a white elephant of a property, half-built and harder to unload. 

 You will be allowed a certain number of draws during the course of the project; you won’t be able to pull money out every couple days.  You have to plan and anticipate when you’ll need funds.  Since we were managing our own project, we generally submitted a draw request every 2 weeks or so.  This is something you’ll discuss with your loan officer before the loan papers are signed.

 It helps to keep a spreadsheet of some kind to track your numbers – especially if you are managing your own project.  Each subcontractor will have given you a bid, you signed a contract with them and you will be making numerous payments to them.  Plus you have all the product that you’re buying, what you expect it to cost vs what it DOES cost.

You'll be doing a lot of this...

I used an XL spreadsheet to do the math for me.  That way it’s obvious if you have a cost overrun and need to trim your budget somewhere.  Unfortunately, this isn’t Monopoly.  My sister and I used to have marathon Monopoly games with our friends, they lasted weeks.  We’d have to create our own money in order to keep the game going.  And, yes, we had $500 in the middle and all taxes and fees went there, too.  And if you landed on Free Parking you got it all!

 Your construction loan has a ‘due date’.  If your project isn’t completed by that date, you must BUY an extension to the loan.  This fee amount will differ based on your project, of course, but I’ve heard numbers like $8000 for a loan of about $1,100,000 (which included the land mortgage) with a loan extension of 3 months.

Well, if you're desperate, I suppose this might help...

Oh, yeah, don’t forget to include sales tax in your calculations like I did. That is, unless you plan on buying all your stuff at Orchard Supply Hardware on one of their ‘we pay the sales tax’ weekends.

 Well informed is well armed.  Learn as much as you can about the processes of doing a construction project on your house and you’re more likely to survive with your sanity intact 😉


photo credits:  Mr. Monopoly from:  www.hasbro.com
Messy files = my own credenza, sorry to say 😦    Do as I say, not as I do?  Well, my project file was immaculate!
All others = www.morguefile.com