Mortgage-construction loans can be confusing for both homeowners and contractors. One way to think of a construction loan is as a limited line of credit that lasts until the remodeling process is finished. To give you a sense of how mortgage-construction loans play out in real life, we’ll walk you through a recent project we completed within the very specific parameters of the construction loan process.
Our customer Erin, having recently purchased a home, was looking to completely remodel her kitchen and bathroom, in addition to relocating the home’s side entrances and moving a half bathroom to another room in the house. We asked Erin for her thoughts on how the process worked from a homeowner’s perspective, and—like almost any remodeling project—it had its pros and cons. “The loan process is a long one,” she told us, “but overall geared towards protecting the homeowner, and it was worth it for us to get the house that we wanted.” Be advised, though, that a lot of paperwork attends construction loans, and the process can be somewhat intrusive. Even before her loan closed, an inspector came out not once, but twice to “make sure the cost of the renovation projected by the contractor was not an overestimation.”
That brings us to the contractor’s perspective. With mortgage-construction loans, contractors are required to complete all design plans, get estimates from sub-contractors, and provide exact costs upfront before the loan closes or the contractor is paid anything. “Typically the company doing the work has to fund the project to get started,” our contractor Scott explained. “Once things get rolling, we can submit for payments. But only after certain stages in the process have been completed. This can be overwhelming for a smaller company that lacks the cash flow to do this.”
Once a mortgage-construction loan closes, the loan inspector continues to play an integral role. Once the loan was approved and the work began, Erin says, “the inspector had to come out three different times to inspect the work, and he was the one who gave the OK for the bank to give a payment to the contractor. We had to sign saying we were satisfied with the work and, once the job was done, we had to have two final inspections.” Until both the inspector and homeowner have approved certain stages of the project, the contractor goes without payment and a percentage of the loan for the homeowner is held back.
We’ll end this post with a few final thoughts from our customer—thoughts that, more or less, sum up the major pros and cons of mortgage-construction loans:
“This loan is definitely geared toward protecting and helping the homeowner, which was nice, and now that we know the process it makes sense,” she said. “Overall, I think it’s more work for the contracting company because of all the extra work due prior to securing the loan and because of the delays in getting payment from the bank. We are very thankful to Scott and Tom Curren Companies for taking a chance on us and agreeing to work with this type of loan. They did an amazing job and were so professional throughout the entire process!”
So, in short, a construction loan can be great—just know what you’re getting yourself into, do your homework, and ask the tough questions before diving in.