I guess each bank must work differently. We had to put in our money first before the bank would start to loan us money--lowers their risk. We also owned our land outright. We paid our cash directly to the builder in the beginning until what we put in met the amount the bank had required us to put in before they would start to disperse money.

And regarding administing the funds, our bank would disperse the money directly to the builder or to us, but recommended that the money comes to us so we maintained control. And you should be "watchdogging" from the very beginning, regardless, since it is all your money in the long run.

One more suggestion for you--if you think your cost is $550, and you have $250, I would try to borrow $350 instead of $300. If you don't use it, great, but chances are you will. We did this and I'm soooo glad we did since we would of had to go back to the bank for more money, or used up money in our savings that we didn't intend on using for the house.

Happy building!

Our situation was just about what va_rosemary's was. I second her thought that you should allow a good amount for overages. In our case we put in an extra $60,000 in the loan at the beginning, and we've used a lot of it because of decisions we made to upgrade. We also owned our lot outright.

I hope you enjoy your build! These forums are a great resource all along the way,with so many knowledgeable and helpful people.

Ok, so they are using your land as a down payment so that means that you've met the down payment requirement with a zero $ cash outlayment. You have a few options with this scenario. One is that you exhaust the bank's funds through the draw schedule first before putting begin to pay for the work with your own saved-up cash. This means that you will be paying more interest throughout the length of the construction period. The second approach would be to use your cash upfront and once you've exhausted the funds you have set aside for the build you begin to use the loan proceeds.

You really need to check with your banker on this. You need to make sure that the financing is based on a total of $300K rather than a total of $550K. If it is on the $550K, then you will be responsible for putting in the $250K as an additional down payment at CLOSING (upfront in most construction-perm cases)if you do not qualify for the entire $550K amount. That would guarantee that you would not hold onto your money throughout the build. The reason that I keep coming back to this point is that banks will often look at the "contract sum" as their starting point to arrange financing rather than what the amount of the "mortgage" will be at the ultimate conversion of this loan. If your bank does consider the "contract sum" in their calculations, you will need to take this into account in your contract with your builder.

Good luck...You will not sound like an ignoramus to your banker...each bank has their own way of doing things and sometimes it is hard to figure out!

We gave our down payment (to the lender) when they modified the construction loan to permanent loan. I think you can do it either way (pay when you initially close on the construction-to-permanent loan OR pay when you modify it to be your permanent loan), but I'd check with the lender to be sure.

Thanks y'all. If I've got this right, we give our $250K to the bank upfront. Then, the way our bank does it, we pay interest on the cumulative total of the builder's draws, which they bill us monthly. So, we pay the bank to hold and disburse our OWN money??? I'm gonna become a bank.

We'll be not only paying interest to the bank on our own $250. as it is disbursed, we'll lose the interest we're now making on it where it's invested (at 5%). We have no choice, given that we don't have enough money to build for all cash, and we don't have enough income to qualify for a much bigger mortgage. I'll ask her what's the most we can qualify for, and we'll max out on that, but this just sounds insane. Just Reality 101??

I have taken your other advice to heart and will do. What I'm thinking now is that we need to borrow the absolute maximum the bank will lend us, so we keep earning interest on what cash we can hold onto. At least we won't be paying the bank basically to administer all of our $250K and make even more money off us.

The only other option I can see would be to pay the builder a bigger deposit/retainer/get-started amount upfront. And have him delay taking draws till he spends all that. We still would lose our savings interest earned on it, but at least wouldn't be paying the bank interest for handling it. Our builder is well-known here in his profession, but I'm just not that trusting to fork over a bunch of cash to a builder of ANY renown. We'd be taking too much of the risk; better to pay the bank a few grand more and let them take it.

Am I thinking correctly here about our best strategy? Are there any other good options?

You just need to clarify what your bank's expectations are. If they are using the mortgage amount rather than the cost of construction as a base for their numbers, then you can do whatever you want, whenever you want with your $250K. The only way you can make a decision about what is best for you and your family is to completely understand the parameters within which you are working. We cannot answer the questions for you about what is best because we do not know your banks lending practices. The only way to fully make an educated decision about this issue is to have a meeting with your lender to completely nail down all of the factors involved.

dixiedoodle: I think we'll have the situation you said--the contract sum. I just looked back at the (copious, but ill-understood at the time) notes from talking with 4 different lenders. They will all let us use our paid-for land as the downpayment, but they bring it into the total loan package, of course. They base the loan amount on what they called the appraised-value of the new house plus the appraised value of the land. So, if they appraise the house at $550K and the land at $200K, our total project is $750K.

Then they allow us the $200K for the land, back that out as the downpayment, and we're back to the $550K construction cost, as estimated. There's no way we can qualify to borrow $550K on our income. All the bank has done is find a way to bring the land into the contract; I understand they want a lien against the land if they're lend money to put a house on it.

So, I see no way around it: we're gonna have to put in our $250K up front, and try to qualify for the remaining $300K. Or as much more as we can, so we can hold onto some cash for overages and out-of contract costs. This seems really strange. Either I just don't get it, or I do get it and find it distasteful!!

First of all, don't be afraid to ask questions at the bank. They are used to first time builders and if they mind our questions, then they don't deserve your business.

We did it a little differently. What we did was put our cash from the sale of our old house into a separate account with our financial planner telling him to keep it liquid. Then we took out a construction loan for the full amount of the build.

When we got our first draw request, the bank sent it to us for our signature, we signed it and the bank paid the builder. Then the bank sent us a statement showing the amount of the draw and the interest. All we were required to pay was the interest, BUT what we actually did was pay the full amount.

Next draw, same thing. Result is we weren't paying interest on the construction loan.

Also, during the build, as overages happened, we used those same funds to pay for them.

When the balance in our liquid account got down to about $50,000, I simply signed for the draw and paid the interest only amount (keeping a reserve for possible last minute issues and also for finishing the basement on our own later).

When the build was finally completed, I took the remainder of our liquid fund and sent it to the bank specifiying that all of it was to go to the principle of the loan.

This method saved us thousands in interest since for most of the build, we owed the bank $00 until about the last three months.

bj

We had a simialr siutation. We used up our cash on the first 2 draws plus a partial on the third (the bank paid the other part of draw 3). AFter that - all draws were paid by the bank. We chose this route to delay the interest payments on the contruction loan for as long as possible. We broke ground in September of last year - but our first significant payment of interest to the bank just started this month. That worked out best for us because we had big delays (remember to get a schedule!) and at least we weren't caught having to pay interest on the loan during this time.

You could flip the strategy and use bank funds up early - but then you have interest payments earlier. And if you have a delay - you will be paying interest (stress meter is starting to rise!) Either way can work - just think about your cash flow as well as tax situation (maybe you need the write off).

The mechanics are very simple. For the draws we paid from our cash - we wrote the builder a check. Get a receipt for the draw from the builder because the bank needs it as proof of payment before they will start paying draws from the money you are borrowing. When you do this - you might want to have your own inspection done prior to each draw to make sure all work has been done to code or do your own inspection. I chose to do my own inspection.

Once you are through with your cash out - then the builder will make contact with the lender to say he is ready for the next draw. The lender will schedule an inspection - once complete - the draw will be paid. Don't expect these inpsections to be anything more than a quick look to make sure that the major pieces are in place.

We decided to have an active role in the dispersement of the money (your lender should have a form that you must sign and the builder must sign that is an agreement on the disbursement method).

An active role means that when the builder asks for the draw - the bank contacts me to see if it OK to send the money, even after the inspection is done. I also opted (this is on the disbursement form) to have the money deposited into our bank account. Then I pay the builder with a check.

My builder does not like this arrangement - most won't. My banker advised me to do it since it gives me some level of control. I happen to like it.

If you opt for the passive role, then the builder asks for a draw - bank sends out inspector - and then money is directly deposited into the builders account. You are notified of what is going on, but the entire transaction is done without you having to specifically approve of the draw disbursement.

Hope this helps.

zone8grandma and sniffdog: Many thanks. I'm printing out your responses for my file. This is all so helpful and good to consider ahead of time. I see a couple of strategies now for conserving our cash. And, yes, anticipating the possibility of delays, I like not having that bank interest piling up. Hadn't thought about delays.

Also, I just got off the phone with our lender. Told her I wanted to know what the most I can borrow is, since we're to meet next week, I hope, to see our builder's initial cost estimate. We're qualified to borrow a staggering amount of money; we'd have to eat cat food if we had total monthly housing costs that high ( Given our total situation, they'd let us go up to 50% debt to income ratio! No wonder people are defaulting on their mortgages.)

But the good thing is I now know we can borrow MORE than we even want to. To live comfortably, we still will need to work with the builder to reduce the construction cost. (Always cautious about the unexpected later on.)

HUGE relief! Thanks so much everyone.

We also own our property and our home. When we began the garage we simply paid for the site work (extensive), the foundation (all that's done, so far!) ourselves. We'll likely pay the first materials bill and the first framing bill that way, too. Then tap into the home equity loan money to get it "tight to the weather" and sided, and the final driveway and roadside landscaping in place.

After that, we'll decide if we want to "finish" the second floor immediately or simply sit back and "wait a bit" to see what develops with the economy.

snifdog brought up a good point. The way our setup worked, the builder would not get paid until we signed for the draw. Our contract stated that if they weren't paid by the 15th of the month, a stiff penalty would be added.

More than once, the draw would have items that either were only partially completed, or not even started. When that happened, I called the bank, the girl at the bank called the builder and asked them to re-submit the draw request, then they would fax the new request to us. We chose a bank who had a good working relationship with the builder - that helped immensly.

I'm with chelone. We also own our land outright. We have ~55k to use cash for our home. So far I paid for the floor and roof trusses cash (my brother works at the truss co., got them for cost!), the heating and cooling cash (again family, this time a cousin.) I also will pay for my cabinets and countertops, the whole house audio system, all the light fixtures and hopefully some of the finishing concrete work (sidewalk and lower patio.) My builder is giving me a credit for all of these items, since they are on my allowances. The CU is fine with arrangement, they only have to front 200k for a house that will be worth 400k. Win-win for lender and buyer.

You won't have to pay interest on the 250000 down payt when it is used. I may have read your post wrong but it sounded like you might have thought that. You will only start paying interest when they start digging into the 300,000 loan portion.

charliedawg: thanks. Yeah, I thought I was gonna have to pay interest on my own money and that's why it sounded preposterous to me.

I've had quite a day on the phones. Talked to our banker in more detail; found out they'll lend us all we need--and that's more than we can afford to make the payments on. Got the first cost estimate from the builder. Gave him a $400K budget to shoot for. His estimate was $575K. Whoa!

We're meeting with him at the land next week to start chopping away at the unchoppable. Thought we'd designed it to be real basic, but well built and comfortable. Apparently that costs an arm and a leg. We were hoping for one big item to cut that would do it. I suggested the garage (we could park in the yard) but DH objects. DH suggested the kitchen, knowing what an expensive room that always is. I'm mulling that over. Sink, small refrig. and microwave; maybe a rolling cart. Might work. Years ago I saw a magazine article where the woman said her family had forced her to install a basic 8 x 10 kitchen. She said all she wanted was a phone and a fistful of takeout menus.

So, the first cutting session with the builder will be a tedious meeting. But I feel so relieved after all you guys' help. And getting more information from banker and builder (even if it's hard to swallow--gulp) is better than being in the dark and shaking.

We know we'll have to borrow more than we wanted to, but we still really need to cut at least $75K off it before we start. Figuring we can cover a 10% overage; then build the rest on Mastercard and VISA!!

bj

Are you making the assumption that the 575 number your builder gave you is the actual final cost of the house? Read other posts on GW - you will see a common theme that many people end up finishing much higher than the contract price for the house. Is this builder giving you a fixed price contract - soup to nuts - for 575? How many of the cost items are "allowances" - those items that the builder has estimated for finishing materials like cabinets. FInd out how real these estimates are by shopping - more than likely they are too low.

If the builder is not giving you a fixed priced contract for this house then you have to figure that the house will cost at least 15% more than the cost he gave you (it might be more than that.)

Before I started cutting anything, I would dive deep into all of the cost items to understand what the 575 includes, and how real these numbers are - and if everything has been covered (remember - you have the structure, site development, and utilities - has he addressed these items with realistic estimates?)

Finding one big thing to cut is probably not realistic. Cutting the garage or the kitchen also sounds very drastic and could hurt you badly if you ever tried to sell.

My first reaction to your last post was uh oh - this is trouble. If you can only afford 550 and the builder is saying 575 (at this early stage) you are probably looking at a 625 to 650 final cost - at least. You probably need to cut back and/or borrow more money to make it work.

varosemary: yes, I'm concerned too. We're going to have to make more cuts so we can afford it and to allow for overages on unpredicatable items. We won't be ready to sign the contract anyway till after we get a report from the Structural Engineer about the site and foundation work. Waiting for that; then the builder can adjust his estimate accordingly and we'll see where we stand.

He has very detailed specs from us and has been getting estimates from the subs on the more expensive systems, like radiant heat. He has model nos. and MSRPs for everything down to the faucets and door handles. I gave him the name of my contact at the window distributor for the fiberglass framed windows. So, there won't actually be many allowances; the things we have control over will all be specified as part of the contract.

It is a fixed fee price and I think he's being very careful with his estimate. We've talked with some other builders who build "cost-plus" and we got lower estimates from them. I have to say, I though cost-plus was better, but now that I see this approach I believe we'll come out better in the long run. I believe we'll have a bid price that's much closer to our actual cost.

I was joking about kitchen or garage. We're just running out of things to cut!!