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February 17, 2008
Financing renovation through construction loan?
We are looking to buy a brownstone that we need to gut renovate, but we can't really afford to pay for the renovation out of our savings.
Are there mortgages where we can finance the renovation?
I have heard there are "construction loans" one can get, but how do they normally work? (e.g., money down, timing, terms, etc.)
Thanks!
Comments
There are loans which I think are called construction to permanent loans. The loan is a construction loan during the construction phase and converts to a permanent 30 year loan afterwards. We thought about using this type of loan when we considered a gut renovation, but ultimately decided to by a house that needed a lower level of renovation work. These loans are pretty labor intensive. The lender will want to approve your plans + the contractor. The loan is drawn down in installments and the bank will likely monitor progress. They sounded very bureaucratic. I think Wells Fargo, HSBC and Indmac were banks that we found which had this type of loan. All of this was several years ago, pre-credit crunch, so I don't know what availability is like now.
Posted by: Boerum Hill at February 18, 2008 1:39 PM
It's my understanding that any construction loan a retail bank would grant requires a certified bid for a construction contract.
In other words, the process would be to acquire ownership of the property, hire an architect to produce plans for both the filing and the bid, obtain the Dept of Buildings filing, then issue the approved plans for bids for a construction contract. Then and only then can you seek the financing. The full construction contract is what the bank considers in your application for financing.
If you are approved, the bank then determines the number of phases necessary to complete the work. After one phase is done, foundations for example, that contractor submits his or her invoices to the lender, and the lender inspects the foundations to determine if they are complete. If complete to the inspector's satisfaction, the lender pays the contractor's invoice. The borrower doesn't hold the money or invoices in this process.
You would want to seek this loan specifically from a construction loan officer -- most mortgage brokers or conventional loan officers don't have experience in construction loans. It might be a good idea to inquire directly at a retail bank that has a construction lending division what their specific down payment requirements, process, etc would be for a loan.
Posted by: Smokychimp at February 18, 2008 2:16 PM
We did this. Both Webster Bank and Wells Fargo make these kidns of loans, and I am sure others do as well. You can get a mortgage in which the purchase money is released for closing and an additional amount held for construction. You will need a contract, plus estimates for goods and materials you will be purchasing outside the contract. You will be borrowing against anticipated value -- which will need to be supported by an appraisal. The bank will release the construction portion of the proceeds in partial amounts in accordance ot a completion schedule (e.g., 3% for electrical, 5% plumbing, 2% painting, etc.). As you complete portions of the work, you have the work appraised for progress and the bank releases funds. Therefore, you will need enough cash to make any progress payments to the GC and purchase any goods and materials that are not in your contract before you are reimbursed, but you do not have to carry the whole job at once. Just be aware there will be a lag.
Good luck.
Posted by: slopefarm at February 18, 2008 8:42 PM
I bought a three-story, three-family brick last June and have a construction to permanent loan through Suntrust. The Suntrust loan officer I worked with is Kathia Francis and she is terrific. (I got her name off of this board and then did some additional research.)
Here's the way it worked with my loan: The total amount of the loan including the purchase price and construction costs can be no more than the after-construction appraised value of the property. I did not have to have approved plans from the DOB to close, but the bank did require that I submit a cost breakdown, the contract with my licensed contractor and plans from my architect in order to get approval before closing. (This did not slow me down though. From the time I first saw the place to closing was less than three months.)
The earlier poster is correct that the construction portion of the loan is paid as the work is completed. When I make a request for a draw, the bank sends an inspector (generally, next business day). He comes by and takes photos. The money is usually wired to me the day after that. So far this has all worked out very well. The only caution I have for you is be sure your contractor can handle not being paid until after each chunk of work is completed.
Good luck!
Posted by: guest at February 18, 2008 10:23 PM
Keep in mind that many of the construction loans are NOT available for multiple family units.
Posted by: evperry at February 19, 2008 11:32 PM
Ah, just starting a construction loan. I paid cash for the house and will put an equal amount into the renovation. The loan to value is very low- 50%. The bank will not pay on the construction day one /dollar one until I have paid the difference between the project cost and the loan amount. Someone above mentioned that it is very bureaucratic. Imagine a loan that is like medical insurance. You have to submit claims and hope that they pay them. In addition, each time the "inspector" comes to the site it costs you money ($150.00).
Posted by: guest at June 30, 2008 9:13 PM
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