construction-to-permanent financing...

Hi guys,

My girlfriend and I are in the process of buying a property through a short sale which is in a great part of town but is needing a bit of rehab. The house was built in 2001 by a reputable builder and really just needs new carpet, kitchen/bathroom updates and loads of landscaping.

My loan officer was talking to me about getting a construction loan which would roll into permananet financing when we close on the house. My question is, how the hell does this work?

  1. When the construction loan is granted, who decides what amount we will qualify for?

  2. Who has access to these funds? Meaning, do I have to have a certified contractor doing the work, or can I draw money from the account and do the work myself?

  3. Are there restrictions on things this money can and cannot buy? As in, can I use this money to buy appliances and furniture?

Thanks a bunch!

P.S. This is going to be our primary residence.

  1. A construction loan is available usually for 80% ARV. So for a 200% ARV you can get a construction loan for 160K.

  2. You have access to the funds. You draw money dually from the bank and lien waivers generaly need to be signed as funds are disbursed to contractors, or receipts need to be handed in. It depends a lot on the bank requirements.

  3. No real restictions as long as it is being put into the house.

Thank you.

So, I could just move into the house at closing then begin drawing a pre-determined amount of funds from the account to start rehab?


Brockovich, help me out here man.

My loan officer says that the bank will not “allow me to be my own contractor” and the work that I’m wanting to be done, has to be done by somebody certified. THis is bullsh!t

Why would I pay somebody $500 per room to paint when I could do it myself for $100? Why would I pay a thousand dollars to have somebody lay carpet when I could do it myself for a third of the price?

This is pissing me off! Does this guy not know what he’s talking about? What is going on here? I cant imagine that every time somebody takes one of these loans out that all the money is going to a contractor.


For relatively easy items such as painting they should be understanding. I have dealt with mortgage broker products where I had to write them a letter of explanation stating my experience doing the various jobs and why I believed I was able to perform the work.

If they still say no, find a new banker!

If they are confident in your abilities they shouldn’t care unless it requires licensed work. Electric panel upgrade, major plumbing, HVAC etc… Remember the bank has a vested interest in the property too so they want to insure the money is responsibly spent. If you are buying materials and doing the work they should reimburse you for it. Paying yourself gets a little tricky. However, start an LLC and so you can establish some indepence from your personal involvement. Invite the bank in once a week to monitor progress. If they don’t work with you and it’s a good project and you have good credit, you can get someone to work with you. I am doing a construction loan with my current project and have no issues like this. I submit receipts and or invoices and they cut the checks and I have them within 24 hours for disbursement. I then get lien waivers signed and pay the contractors or pay myself for material reimbursements. I have them come in periodically so they can feel good about the money I am spending.

There are several types of loans for construction. I typically use a rehab loan from a local bank. I have to submit a list f repairs and a break down of the costs for each item.

New Plumbing rough in - 6000
New Plumbing fixtures = 300
Framing 20k
demolition - 8000

This is used to determine the toal amount of the loan. The loan cannot exceed 80% of the After Repair Value (ARV). They send out a bank appraiser to determine what the ARV will be based upon your repair list and floor plan.

My bankers also state that they require a licensed contractor but they never hold me to it or ask who it is.

My draws are taken after the work is performed and an inspector approves the work. For example, once the plumbing, HVAC and Electrical rough ins are completed, I submit for a draw. The inspector comes out to verify, and I am then wired the refund.

Hope this helps.

The fact is that banks aren’t just forking over money for new construction. I hope you were honest in letting them know that you’re doing this as an investment and not an owner-occupant.

Lately, we’ve been getting loans for 20% down on the total project cost. There’s new lenders on board who claim they will do 20% down for land and fund the rest of the project.

The bank is going to want a licensed contractor, full draw schedules, plans, and perhaps other documents. They typically have 5-7 draws total, which are held in escrow. Some banks verify by making visits to the property to make sure repairs are done right, others rely on city inspectors and/or third party inspections.

If you have a lot of experience or they’ve worked with you in the past, things may be different.

There are some local banks that will go to 90% ARV. However I don’t know of any that will let you act as your own contractor. First of all because unless you make your living as a contractor the bank is not going to be comfortable putting money in your hands for work that may or may not get done correctly. Second here in Texas they have very strong laws in regards to cash-out loans and technically if a bank is giving you cash for your house it is a cash-out loan. If it is a cash-out then 80% LTV is going to be your max loan amount. Hpe this helps.