All About Construction Loans (OR “The Not-So-FAQ”)

As I mentioned at the end of the first half of this post, it always surprises me that nobody asks us this question:

If the land is paid for and you’re getting a loan for the construction of the house, why exactly are you living in a bus?

There are a couple answers, of course.

The opportunity to be able to live an alternative lifestyle and see what it’s like and say that we did it is rather appealing. Each of the 3 Things We Don’t Miss About Living in a House  contributes as well.

But the main, most practical reason that we are making this choice comes down to this: once we obtain the loan for the construction of the house, we have to start paying interest on it. 

Here is how I understand the process (Disclaimer: I have absolutely no experience with this process yet and all of this may or may not be wildly inaccurate. Please do not make any major life decisions based on the information you are about to read):

A construction loan is usually structured in “draws” – apparently  just handing over a huge chunk of money and letting you have at it is FROWNED UPON in most establishments. Go figure.

So. First, you submit all your plans and a complete bill of materials and every single expected cost down to the penny (there is probably lots more stuff you have to give them, like the rights to your firstborn child, etc.)  and then  the bank gives you juuuust enough money to cover your first set of expected expenses (this is the First Draw).

In our case, (I’m totally guessing here) the first draw will pay off the lien that Noah’s step-dad holds on the land, and will pay for things like our permits, soils and compaction reports, septic installation, possibly the foundation, temporary electricity, BMPs (I totally don’t remember what that stands for, but it’s important) and whatever else is needed.

You (or your general contractor) get all that stuff done (AND inspected) and prove to the bank that you did it by submitting all your invoices and receipts and what-have-you. Then you ask them really, really nicely for some MORE money (the Second Draw).

This cycle continues until the project is complete and you are eating breakfast at your new kitchen island/breakfast bar (which is so exciting because you’ve never HAD a kitchen island and/or breakfast bar! Eek!) and quietly drowning in debt.

All that sounds great, right(aside from the debt part)? The bank gives you all the money, the project goes swimmingly and then it’s done, you move in, you get a mortgage and you live HAPPILY EVER AFTER!

The only problem is that as soooon as you get even the first penny of that first bit of money you have to pay interest on the amount the bank has loaned you. Boo! Usually, the interest rate is much, much higher than a normal mortgage rate (the last time we were quoted it was around 10%) Boo (x 2)! The only (kind of) nice part is that it’s simple interest, as opposed to compound interest Yay!

What that will look like for us (completely and totally hypothetically because we’re still not at this stage yet) is that the bank will give us, say, $100,000 for our first draw (I have no idea if it will be that much, it’s just a nice even number). That means that that same month we will owe them (assuming 10% simple interest) $833 (for an explanation on how I reached that number, click here) and will continue to have to pay that every month until we receive the 2nd draw  and then it will increase in relation to the total amount drawn. Blech.

There are additional costs as well: closing costs, possible change orders (God forbid) and just general unexpected expenses that I have been assured will occur without a doubt.

ALL THAT TO SAY: If we were paying rent monthly in addition to having to pay what equates to another rent payment (and will eventually become like three rent payments), we probably would have wound up being evicted and living somewhere much less nice than a bus.

Just saying.

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8 thoughts on “All About Construction Loans (OR “The Not-So-FAQ”)

  1. Draws are a usual thing in this type of construction, but it is a bit unusual for 10 percent, that is awful steep….most draws will not cover what is the cost of the land, that is usually left to what agreememts that you have made with the lender on the land unless the bank preffers to hold the entire note…draws will come in as the first stage…ground work, frameing, rough work , sewer system, rough plumbing, no buffer, second draw will consist of such things as to finish such items that will get the project ready for the third draft…cabinets, paint, finish trim work, door hardware, anything that makes the house complete…so it is a long process…yes bankers will ask why your living in a bus..and yes you have done a great job of that…stil bankers do not share all dreams…you are doing well…go with it..and you will be fine.

    1. Thanks!
      As I understand it, the bank will want to pay off the lien so that they have first priority for debt-repayment… there’s a specific term for that, and I can’t recall what it is, but that’s what I’ve heard, at any read. It’s not a huge amount, so we’re not anticipating a lot of problems with it. It will be interesting to see how this whole process goes!

  2. It is mind boggling… and being pregnant at the same time trying to give your children a good experience and keeping hubby happy!

    You are amazing!

    1. Thank you so much Barbara – but really, Noah is bearing the brunt of all the hard work. He’s been absolutely phenomenal – working 40 hours a week, keeping things going on the home front despite all our setbacks and problems AND taking care of the kiddos in the evening when when I’m not well enough to. He is doing MORE than his fair share, but I appreciate the kudos!

  3. Living in the bus and saving looks more attractive all the time! 😀
    I personally hate debt, and hate interest even more. I think caution would be in order, I’d so hate to see you lose all you’ve worked so hard for! I’m adding a devotional from Billy Graham about money, hope you enjoy… 🙂 God Bless!

    Keeping Money Our Servant

    Billy Graham
    April 15, 2013
    Matthew-6-25

    Do not worry about your life, what you will eat or what you will drink. . . . Your heavenly Father knows that you need all these things. — Matthew 6:25, 32

    We aren’t supposed to let money become the most important thing in life, but when bills mount, it’s hard not to become preoccupied.

    The problem is that money can all too easily become our master instead of our servant. That’s why the Bible so often talks about money, warning of its dangers and urging us to put it in its rightful place. The writer of Ecclesiastes wisely observed, “Whoever loves money never has money enough; whoever loves wealth is never satisfied” (Ecclesiastes 5:10 NIV).

    Once we put Christ first in our life, however, we can ask Him to help us trust Him for our needs. Our Heavenly Father knows we need clothes, food, and a place to live, so we don’t need to worry. That may seem impossible, but God will give us His peace as we learn to trust Him. We also need to deal with our finances responsibly— following a realistic budget; developing a plan to pay off debt; even cutting up our credit cards if necessary. Don’t become a slave to money. Learn to trust God in everything. — Billy Graham, Hope for Each Day

    ***

  4. Another great reason to live in your bus is that you can be right on site while the work is being done. No slackers allowed! That is, if you can stand the banging and hammering starting at 7 or 8 am every morning! It will be the sound of progress. I’m sure you’ll want to put on a hard hat and go out and help them along.

    Okay, I have the audacity to ask a FAQ. Do you have a tentative start date yet? Of course, you only have one season there (well maybe not,) but we only have about 5-6 months of decent working weather here, so people start in as soon as the ground thaws enough to dig. When my dad was building our church (yes, he built most of it by himself at age 69-70, with some help from his 75 year old friend and few young guys on the weekends,) they were pouring the slab in November and it was freezing out, but they wanted to get it done before the ground froze or they would have had to wait until June.

    1. That’s awesome about your grandfather! And you’re right about there really only being one season here. Currently, we are waiting on elevations for our floorplan . I *think* after that we can start taking the plans to the bank. Assuming best case scenario (ha!) with paperwork and permits I’m going to guesstimate within the next three months before we physically break ground.

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