Residential building projects are typically funded either by the owner’s cash or by a construction loan from a bank. A construction loan is a short-term loan taken out by the owner or builder to fund the construction. Loan types vary over time and from bank to bank, but the typical construction loan is interest only and paid out as work progresses according to a draw schedule. When the project is completed, the loan is either refinanced into a traditional mortgage or it automatically converts to a conventional mortgage, a so-called one-time-close or construction-to-permanent loan.
What’s Your Budget?
You don’t want to find yourself in a situation where you run out of money before a project is completed, or are forced to stretch yourself too thin or move into an unfinished home. So setting a realistic budget at the outset is critical. READ MORE
Unless you are paying cash for your project, you will need a construction loan to pay for the materials and labor, and you can use it to buy the land as well. Construction loans are a little more complicated than conventional mortgage loans because you are borrowing money on something that doesn’t yet exist. The bank wants assurances that you (and your contractor if you are hiring one) can get the house built on time and on budget. READ MORE
The draw schedule is a detailed payment plan for a construction project. The goal is to make progress payments to the contractor (or owner-builder) as work is completed. To avoid conflicts over payment, it’s important that the draw schedule closely reflect the actual value of work completed. READ MORE
While some general contractors like to get a substantial deposit before starting a project, banks do not do business this way and nor should you. The first payment should not released until all permits and approvals are in place, proof of insurance is provided, lien waivers are signed, and a substantial piece of work is completed, such as the foundation. READ MORE
A mechanic’s lien or construction lien is a claim against your property made by a contractor, subcontractor, or material supplier who feels he has not been paid in full. A lien creates a “cloud” on the title, making it difficult or impossible for you to get a mortgage or sell the property until the lien is lifted. At worst, you can end up paying for the work twice READ MORE
The Final Check
If unresolved problems remain at the end of the job, final payment can become a contentious issue. It is important to have some financial leverage at the end of job to help motivate the contractor to take care of any loose ends, and to do it promptly. READ MORE