How do construction loans work?

Question

If I wanted to purchase an existing home for 250K and make 30K in improvements how would that break down? Would a I pay the existing mortgage on the 250K and would the 30K be an additional payment??? Do they give that too you all at once or is it used as a type of line of credit? Any info would be appreciated..

Answer 1

Assuming you don't have the cash to put down $30K and then just use an equity line, then I guess you'll need a construction loan.

The programs vary widely, but they'd pay off the seller, and you'd basically have a line of credit to draw from to complete the rest of the work. The bank will send out an inspector to approve the funding as the work progresses. Then, after that phase is done, you'll either have to close on a whole new loan, or do a modification to permanent financing.

Shop around hard for a loan officer with direct experience in construction lending. It's much different from just doing normal mortgages, and most don't have a clue.

Answer 2

Basically, the bank would get an "as will be" appraisal based on the improvemenst you propose. You may have to submit drawings, info. on the contractor and a break down of costs...the loan advance will be based on 80% of the "as will be" value per the appraisal....the loan is advanced based on the draws you need to finish the project. The first advanec would of course be the $250M for the purchase and the contractor's deposit....subsequent pymts are based on the draw schedule the contractor provides to the bank...since the balance would be small, it may be drawn out in full in 1-2 payments....