From: "Charles Spitzer" 
Newsgroups: misc.consumers.house
Subject: Re: Construction Loan
Date: Mon, 1 Nov 2004 11:13:18 -0700


"Terri"  wrote in message 
news:9b00f2ea.0411010935.5e4a7fd2@posting.google.com...
> We started looking at some spec houses in a subdivision, and then
> found a plan that the builders had used previously, and decided to put
> a hold on a lot in the subdivision and build this house.  Originally,
> we were looking at only a mortgage, as we were buying a house
> currently under construction.  Now, we're looking at a construction
> loan.  We own a house now, and only have 2 1/2 years left on the
> mortgage.  The house has also increased significantly in value, for
> instance the tax assesment has more than doubled.  We don't want to
> sell our house and have to live somewhere else in order to build a
> house, but I'm not sure I understand how the equity in our current
> home will impact a construction loan.  Will we have to apply for a
> home equity line in order to pay some of the up front cost in order to
> get a construction loan?
>
> If someone could give me a basic breakdown of how a construction loan
> works from the very beginning for someone who owns a house.  Use the
> example of our current house having a value of $150,000 and the
> construction loan being for $300,000.  I'd just like to be more
> familiar with the process before I talk to the mortgage company.
>
> Thanks.

the bank or mortgage company can explain it pretty well.

basically, what you have in your house is useless for the new house unless 
you can borrow money against it (home equity) loan.

you need to have money to start building the new house. the builder will 
want some money as a deposit. they don't care where you get it, whether it 
be from your savings account, home equity, etc. the bank will want to know 
what type of loan you're going to wind up with (80%, 80-10-10, etc). you 
still have to come up with your deposit, and the mtg company doesn't really 
care where you get it either unless it impacts how you're going to pay off 
the 2nd house mortgage.

once they approve your construction loan, they only give you money to pay 
for what is actually accomplished by the builder on a schedule that was 
approved by the bank. you only start paying on the 2nd house mortgage what 
you've drawn against the commitment. in the beginning, the 2nd mtg won't be 
very much and you may be able to pay both notes at the same time. at some 
point, you'll be paying for 2 house mtgs, so unless you can support that 
with your current income, you have to sell your house in order to make both 
payments. that point will also come into the calculation as to whether they 
will give you the 2nd house mortgage in the first place.