Los Angeles Times Article
on Construction Loans
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Loan is Trickier When
Building Own Home
Los Angeles
Times - Real Estate Section
Sunday, July 6, 2003
By Liz Pulliam Weston, Special to the Times
Once you find
the best deal, don’t expect to get your money all at once.
Lenders typically dole out your funds in five to 10 “draws” timed to
various stages of construction. These can include:
Grading the site and
pouring the foundation.
Framing the house.
Installing heating, air
conditioning, plumbing and wiring.
Finishing the exterior.
Installing drywall or
other interior surfaces.
Installing cabinets,
fixtures and trim.
Interior painting and
other finishing touches.
The money
is typically paid after each stage is completed, not before,
although some lenders
recently have loosened up on this standard, said mortgage expert
Razmik Vartanian of Mark 1 Mortgage, by disbursing just enough
money to cover deposits on supplies.
Construction
loans also differ from mortgages in how lending companies
determine how much you can borrow.
Conventional
mortgage lenders base their loan maximums on the current value of
the property and loan 80% to 90% of that value. Construction
lenders, by contrast, may use the estimated future value of your
property or base the loan on how much the project is expected to
cost.
Suppose
you find a lot for $100,000 and plan to spend $200,000 designing
and building your castle.
The
lender might require $5,000 in loan fees, plus interest and
contingency reserves of about $20,000. The total loan would be for
$260,000, which is 80% of $325,000.
Don’t
expect to cut costs by acting as your own contractor unless you’ve
had significant experience in construction. Most lenders insist
that borrowers hire professional contractors.
I
have done a few construction loans for borrowers that had
experience building and acted as their own contractor,” said
broker Bond. “The lender needs to have the confidence that they
have the experience to handle the job.”
The
best way to contain costs, home remodeler Christensen said, is to
plan carefully and stick to
your plan, since it’s so easy to get carried away. Suddenly you’re
spending $1,000 on spa tub faucets and upgrading every surface in
sight only to run out of money before construction is finished.
“It
sounds funny, since this is your dream home, but you really do
have to rein in your desires,”
Christensen
said. “You need a little self−censorship.”
END
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