Fix your home without borrowing too much

How much should I borrow?

Prepare a budget of all your anticipated repair expenses. Multiply this by 10% and include that figure for contingencies - the surprise expenses. Figure out how long it will take before the property can be resold or rented to a tenant. Whatever that is, add three months to the time unless you have a clearly identified stable of buyers or renters waiting for you. What will your mortgage payments, utilities, and marketing expenses be during that time period? Finally, add the purchase price and closing expenses. If possible, this total figure is how much you should borrow.

Does the lender give me the money all at once?

Most lenders will pay out the loan proceeds a little bit at a time, as you make draw requests. Your interest expense on the new money starts as the lender gives it to you, not from the very beginning of the loan. When shopping for loans, be sure to ask each lender about its funding policy. You want to nail down (no pun intended!) answers to the following questions.

How often do you fund?
What fees do you charge for administration of the construction loan?
What must you have before you fund a draw request?
What is the maximum time delay between a draw request and the money being deposited in my account?
Do you require me to match funds on draw requests? In other words, if I have bills totaling US Dollars 4,000, will you fund US Dollars 3,000 from the loan and must I pay the other US Dollars 1,000 myself?
Do you require any retainage, such as reserving 10% of the loan proceeds until the project is completed?
Do you have any construction-related requirements, such as having a licensed general contractor in charge of the job?

Some lenders disburse a certain percentage of the loan at predefined partial completion points. After the property reaches a specific stage of completion, and after the loan officer inspects the property, the lender will release a percentage of the loan money. This can be a problem if you have contractors who require some payment in advance, if you have workers who must be paid at the end of each week, or if you are unable to obtain accounts with suppliers. In addition, loan officers do not always inspect your site right away just because you need the money. It could be many weeks before you receive any money. Other lenders will deposit money into your construction account each time you present bills for payment. Some charge a handling fee each time you make a draw request. Find this out in advance.

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