It is so important that you borrow enough money to complete your home.
Pretty simple concept, huh? Yet from time to time clients that have already closed on their construction loan call me up and say, "I need more money". Maybe they upgraded an element of their home. Maybe a contractor underestimated the cost of a portion of the home. Whatever the reason, it's a big problem once you have closed.
You essentially have three options; come out of pocket with extra money you need, get a "gift" from a family member or reclose your loan. The third option is going to be expensive and take some time.
It's so important that you get the loan amount right before you close. How do you do that? Get a firm contract, not a "cost plus" contract. A "cost plus" contract allows the contractor to charge whatever the subcontractor charges plus a certain percentage of the cost. If the flooring cost $10,000, and the "plus" portion of the "cost plus" contract is 20%, then the contractor is going to charge you $12,000. It's a great deal for the contractor, but not such a great deal for the borrower. FYI, the vast majority of construction lenders will not allow a "cost plus" contract.
Make sure that you not only have a line item contract and a floor plan but a list of specifications of the materials to be used. Especially for your kitchens and bathrooms. Make sure the type of counter tops and cabinets are clearly spelled out in your contract. Ditto with the flooring.
In fact, give me a call and I'll sent you the form that FHA and the VA make contractors complete clearly spelling out all the materials to be used. This document has to be signed by the builder and the borrower with the FHA/VA construction loan program. I can tell you that more than one borrower was surprised when they saw what materials the builder had in mind for their home.
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