Aaaannnd I’m back in the game. Sorry for the lack of posts, I’ve had a busy week and there is NOTHING going on at the house. It still looks like this:
They should start digging out the basement and laying the new foundation this week buuut that’s also what they said last week! Everyone cross your fingers that dig outs starts this week and we get back on track for a March 30th move in date otherwise we’ll be living on the street and Tucker is too much of a princess for that. Since I don’t have fancy pictures to show you I thought I would explain a little about the construction loan that we’re doing. Feel free to yawn, skim this post or go back to Facebook.
There are a few different types of loans when it comes to buying a house and I would be quoting Wikipedia word for word if I tried to explain them all..or even some of them. What I do know is that there is a “Traditional Mortgage” which is when you have 20% to use as a down payment and a FHA loan you only need 3.5% for the down payment.
Traditional Loan:
House Costs: $100,000
Down Payment: $20,000
FHA:
House Costs: $100,000
Down Payment: $3,500
So as you can see the FHA loan makes it a little more affordable for people to buy a house but on the flip side, it’s usually a little more difficult to qualify for the loan and you have a higher interest rate and need mortgage insurance (more money out of your pocket every month. Woof).
With that in mind, in order to fully rehab a house you either need to have a ton of cash lying around or you need to take out a construction loan. We opted for the later. We had two choices of loans, an FHA 203k loan or a Carrolton Construction Loan and in my brain these are basically the same things. The general idea is that you can take out a certain amount of money over the cost of the house to make improvements to the house. Here is some easy math for you:
House Costs $100,000
You also need to make $100,000 in improvements, say you want a new kitchen, and you want to get rid of the formstone, add a roof top deck, maybe put hardwoods down, who knows if you’ll have enough time but let’s hypothetically plan on spending all of that money. Your total loan then comes to $200,000. You have to have a contractor submit an outline of the work that’s going to be done so the bank knows that you’re not just asking for the extra money to buy a car or clothes. So you sign your life away about 100x times over and get a mortgage loan for $200,000. Easy, right? So congrats, you’re a homeowner! Let’s get this construction going!
Day 1- you have a loan for $100,000 since you haven’t even started construction yet. Life is good.
Day 4- the formstone guys come and expose that pretty brick. That costs $25,000 (that’s a lie, I’m just making this easy.. roll with it)
Day 5- an inspector comes out and sees the ugly formstone is removed and calls the bank “yo bank lady, release the $25,000 to the homeowners. The formstone is gone. Holla”. … 
Day 6- You pay the contactor and you, the homeowner, now have a loan for $125,000.
Day 10- It happens to be the time of the month when the mortgage is due, so you only pay INTEREST on the $125,000. That other $75,000 isn’t really yours yet so you don’t have to pay against it. you win!
Day 15- the hardwoods are put down, which again costs $25,000. The kitchen is remodeled, which oddly enough costs $25,000 and finally you put a SICK roof top deck on your crib and that ALSO costs $25,000.
Day 16- inspector comes out. “yo bank lady, it’s all done. give them the 75k
Day 17: You pay the contractor and now have a full $200,000 loan. At this point some mortgage magic happens and you convert over to a conventional loan/mortgage and you pay both principal and interest and also have a lower interest rate. In my mind I think of it as a second closing but I don’t think that’s the technical term for it but it helps my blonde head work through it. You may need to bring extra money to the table at this point but if your house appraises for a certain amount higher than the loan amount, you don’t! Let’s all hope for a good appraisal when that time comes!
Now, this is the cliff notes version and if Michelle, our mortgage lady, read this she would be shaking her head. There is a lot more that goes in to it and a little more information that I probably should have given you but I didn’t want to put you to sleep. If you have other questions and are thinking about doing a construction loan let me know. We originally wanted to do the 203K loan but found that the Carrolton Construction Loan had additional benefits that the 203K loan didn’t, like converting to a traditional mortgage after construction was finished which in turn lowers your interest rate.
Don’t worry, I’m not quitting my day job and thinking about becoming a teacher or a mortgage lady but I hope that somewhat made sense!
keep it real. xoxo
E
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