There are usually milestones and percentages that they will pay out. They won't let you get ahead - as that's a recipe for running the loan out of money before the house is finished / at the same stage. Overruns are either handled by contingency built in the loan or your pocket. Rarely will they reduce the cost of future items and give you the money now.

I planned to finish the house, get the certificate of occupancy, and pay off the builder--- then start the garage. The garage value was quoted thru one of those Amish-built companies. They could still build it, but I think I can do it for less. If I build it to the submitted plan, I don't see the issue, but I would be general contracting it myself. The bank writes those kinds of loans, though I may not have one. What happens if there's a balance left in my loan? Does it automatically go to pay down the principal?

^This. If you are planning a change you need to contact the LO and change the loan paperwork before you attempt to make the physical change. I would stick with your original plan. It is very difficult to "GC" your own work with a bank loan now. The bank wants a GC involved rather than an owner/builder. Very few lenders, if any, will lend on an owner/builder project especially with an inexperienced owner.

Edit: If it helps you to think about it this way: the loan is a contract where you have agreed to perform your end of the deal with specs and timelines and personnel and the lender has agreed to loan you funds based on your written agreement. It is customary for the lender to approve your GC before issuing the loan to you. They have a separate approval process that you may or may not have any knowledge of that impacts your loan. eg, if the GC isn't approved, you have to get one that can be approved by the lender. Your documentation passed the way it was submitted. You were approved. Your GC was approved. Your garage was approved the way it was submitted. Any change requires a corresponding written modification (for lack of a better term) to the loan agreement. Read your loan terms and conditions.

Rainbow, nobody said I was completing the house or garage outside of the agreed upon specs. At the end, the project will appraise as promised. So, back to my question: if it's possible to build the garage for less money, and there's a balance left, where does that balance go, to me, or to reduce the principal? My loan is for a certain amount of money to be paid to me-- not the contractor. I disburse every dollar. There is no provision in my loan agreement to return a balance to the bank, at least none that I've seen.

Building is famous for cost overruns, but if the homeowner can save money, what's wrong with that?

Goes back to the loan balance. Speak to your LO for accurate info relating specifically to your construction loan. I have never seen left over funds disbursed to the owner at the end of construction.

Something doesn't sound kosher here.

Cpartist, it's Kosher. I contracted with a builder to put up a house. He's halfway done. We went over budget and I paid him from my savings account. The house will be built as promised. No issue there-- except for the overage, which I'm trying to recoup.

I also submitted to the bank a bid from an Amish shed builder for a detached garage. There is no contract with the garage builder. The bank accepted the Amish guy's price for a 2 car garage that I picked out of his catalog. All I'm trying to do is build the garage for less money, and yes, crazy as it sounds, apply the money that I save on the garage elsewhere. I will still build a house and a garage that appraises as promised, and I have the same loan amount that I've agreed to repay.

I don't have a lot of time but will try to answer your questions.

The bank must reimburse you for all monies paid to accomplish the build, in excess of the required down payment or equity, to the extent of the loan.

In other words, suppose you are approved for a $200,000 loan, own land outright that will be used for the equity (down payment), and the house appraises appropriately.

If you spent $50,000 out of pocket and the bank disbursed out $140,000, then you are entitled to a disbursement of $50,000.

Supposing instead that they disbursed $180,000 and you spent $50,000 out of pocket then you are entitled to a $20,000 reimbursement.

Payments made by you to accomplish the build are considered expeditious payments in furtherance of the loan. Most banks will reimburse those sooner rather than later as they want you being able to pay to move the process along. However, that is within reason, if you paid for all materials months before construction begins they are not going to reimburse you until installed. Also, they technically, don't have to reimburse you until the end.

Furthermore, there may be loan terms about approved contractor (there usually is). So you would have to get their permission to GC the garage yourself or they could call the loan. Whether a bank is going to risk a project over a detached garage is another question altogether. I doubt it, but I also find that banks and common sense are strange bedfellows, so who knows...

Good luck.

The GC will be required to build the garage if it is in the original loan documents that were bank approved. It would not be allowed to be built by a third party not under the control and supervision of the bank approved GC.

If you or the Amish gentleman have a contractors license and insurance, the GC can certainly subcontract that portion to you, and you can build it. If the GC agrees to that. I would not plan on that happening.

If the GC would take on the liability of hiring you as a laborer under his workman’s comp, then he could do so, and instruct you as an employee to build the garage. I would not plan on that happening either. Free liability is a hard no thanks.

In all situations, it is the GC that will need to be paid by you via bank disbursements for building the garage, as that is the professional that the bank approved to be responsible for the build. The bank has not approved you to be involved as a co GC, or to work on their investment, or to hire whomever third part. All job responsibility goes through your GC. You are the funding conduit between the bank and the GC as the owner only.

You don't ”recoup” cost overruns. Those are expenses that add to the COST of the build, but not the VALUE of the build result. They are spent and gone. Your savings account is permanently depleted until such time as you add to it again. If the bank agrees to reimburse you for the documented overruns, then you will just have to pay it out all over again when the specific loan amount runs out, and the project still needs that money to reach completion.

If you do manage to cut build costs somewhere , that does nothing for your savings account. It does affect the loan amount. Cutting things also affects the value of the house, which will likely require a reappraisal and redo of the loan. That will require you to bring more cash to the table to cover the value shortfall.

This is a shell game that only the bank wins. You always end up out the extra costs.

"The GC will be required to build the garage if it is in the original loan documents that were bank approved. It would not be allowed to be built by a third party not under the control and supervision of the bank approved GC."

A bank has no authority on how your house is built and who builds it. A bank only has as the authority to claim you have violated the loan terms and call the loan or refuse to make further payments. Both of which put the bank over the same barrel as the borrower.

People fire contractors all the time and banks roll with it, because they don't really have a choice.

Cooks, you sound knowledgeable, and I appreciate everyone's input, that's why I'm here, but several of you are making assumptions, and I want to get your best advice based on fact.

The GC who is building my house is not doing the garage. He's out of the picture after we move in in 3 months.

As part of the same construction loan, the bank loaned me money for the garage based on a one page quote from the garage builder. I have no contract with him, just his standard price sheet. If I found another garage builder who would put up the same basic garage, for less money, wouldn't the bank allow it? Or, they might let me GC it -- it's a basic structure.

I think Bry911 is going down the right road-- and yes, it's what I want to hear! -- that I promised to build a house and garage and as long as I accomplish that to the satisfaction of the appraisal, why can't I use the remainder of the money in my loan line of credit? We're talking about $20,000 at most, to be spent on another portion of my property, adding value.

In the end, it's a local decision with the banker. But I don't see what's manipulative or dishonest about it.

I'm a real estate appraiser. I had a construction to perm loan project that I appraised. It also had a detached two-car garage as part of the appraisal package. The owner was acting as his own GC. At the end of the process I was called out to certify that the home was complete. It was. Only problem was there was no garage. There was a pad where it was supposed to go, but no garage. I took pictures, called the lender and informed them of the situation.

It made a mess of things. The end result was I had to update the appraisal without the garage. It did reduce the valuation. But, the owner got the completion certificate, got the loan and built the garage later with his personal funds. No harm, no foul.

Chances are the lender doesn't care what you do with the garage in the building process or when you do it as long as it's in place and complete when you ask for the Certificate of Completion. Talk to the originator or the person assigned to supervise the process. If you own the land, have already paid for a the build out of your pocket, you shouldn't have a problem with subcontracting out the garage to another builder. Construction draw schedules have some flexibility. You just need to tell them about it. I added a second garage to a personal home build. I didn't bother to tell the lender and I used another contractor to do it. When the home was finished, we had two two-car garages. The lender didn't care.

I would advise you to contact the loan originator and discuss your options. There should be some flexibility in the process. It's not at all unusual for a customer to pay for portions of a build out of their own pocket and not take a draw on the work. I've done it myself. What you must not try to do is draw money to cover items that are not complete. That gets you into trouble.

Just go see them in person. Sit down and talk about it. They'll work with you if you are up front with them.

Of course you are correct in that no bank WANTS to repossess a build in progress. That costs them too much. The bank also doesn’t want homeowners GC ing their jobs without prior approval either. It’s why self GC builds cost more in interest. It’s riskier. When a HO fires a contractor, the bank also has to approve the contractor who takes over. It protects their investment to manage the risk by requiring screening of the professional.

No GC wants the risk of someone on their job site that doesnt have their own insurance, and for whom they will be technically responsible for the work produced. If the HO or 3rd party injure themselves, or build something that won’t get the inspector’s approval, the GC owns that trouble, and it costs him money.

This would be a change order in the contract between the homeowner and GC. I can foresee that additional assumed risk charge eating up well beyond any “savings” imagined by the OP. Free liability isn’t free. It costs. Those costs are not going to be assumed without adequate compensation!

Thank you homechef59. And congrats for reading my post accurately! You get it.

I always planned to talk to my loan officer about building the garage at a lower cost, but your advice to do it in person is smart. Thanks for that. Perhaps I can get quotes for the foundation, carpentry and electrician to show the LO how I can do the garage myself for less money. (It's JUST a 24x24 ranch style garage. If I spend more than a month getting it built, I'm not doing it right!)

And just to clear up one thing I didn't mention, the duration of my construction loan is 1 year, so that's why I'm doing the house and moving in, THEN building the garage. I have plenty of time and It will be easier to GC the garage myself while I'm living in the house on my land, which I own outright-- I know someone asked about that.

Good luck talking with your bank! You’ll have more flexibility if the loan is local. I also suggest calling your insurance agent. If you fall off the roof building this, you need to be protected! Please let us know the outcome.

BTW, we built a garage/shop ourselves, out of pocket, no loan but a HELOC for a bit of it. It took every bit of the two year permit expiration time and then some. We roofed over a Thanksgiving Day weekend, well into after dark, with work lights set up. You bet we talked to our insurance guy! The “while we’re at it’s” scope creep ended up costing way more than we originally budgeted. Be careful with that. That’s what cost overruns do!

Thank you, Cook’s, I don’t mean to underestimate the time it takes to build a garage. Also, I have a builders risk policy for the duration of construction.

@bishbash

Your construction loan is a specialized short term mortgage held in the bank portfolio. You have a form of homeowners insurance (maybe with a course of construction clause) as all lenders require it.

Once the home is complete, you can obtain or perhaps the bank will convert the loan into a standard permanent mortgage and sell It off to the secondary market.

You don't own it "outright" but you do own it with a decent amount of equity now that its all combined... land, home, loan.

I am aware this answer comes a bit late, but for others who might have
the same issue. One possible solution would be to have a detailed
conversation with your bank representative and explain the unexpected
costs that arose during the construction of your house.