Before starting to finance a custom house project, there are a few issues that need to be discussed. We spend money on things that we find necessary, useful or simply destined for our pleasure.
They might be objects, activities or services. Some of them are (relatively) cheap, whereas others might get quite expensive depending on their relevance to our life. A custom house is placed in the latter category, implying serious investments which can strain your budget. You have two options to materialize the building project- you either use your own cash or apply for a construction loan. But before making such a decision, you should weigh the pros and cons of both alternatives. This is why the article will focus on the antithesis of managing a self-funded house project vs working with the bank.
The Two Types of Funding for a Custom House Project
If you have already chosen what “path” to follow, the information provided here will still be helpful because it gives you insight into how to handle the construction budget by yourself or deal with a bank in the context of a custom house project. The article will take each of the two situations in turn and analyze them so that the reader can get an idea about their implications.
Self-Funded House Project
Out of the custom homeowners, almost 20 percent choose to personally cover the costs of such a house project, which means that they have the resources to finance the build and supply the materials. Since these aspects necessitate a lot of cash, one needs to understand how and for what purpose the money is spent.
Sure, using your own financial resources gives you the benefit of being in full control of all the money, but, on the other hand, this also requires you to devise and implement a personal system of management and accounting. Thus, you will be able to monitor the expenditures and costs incurred throughout the process. You can use one of the systems employed by banks to keep control over your financing, simply adapting it to the needs of you and your contractors.
Cultivating a good relationship with your contractors, subcontractors and suppliers will greatly contribute to a better management of your construction budget. By communicating in a clear and decisive manner about what you want and don’t want for your custom house project will prevent you from creating ambiguity, misunderstandings, mistakes or delays- which, we all know, don’t come for free.
Furthermore, it is estimated that almost 60% of the total budget is used over the length of the build. This allows you to take chunks of the funds and employ them in various interest-paying investments, since you don’t have to use all the cash at once over the course of the house project. Thus, you can earn additional interest on your money while you build house.
Collaborating with a Bank
If you have chosen to borrow money from a bank in order to support your construction plans, then you will have to manage it according to the institution’s specific regulation. Although some of these rules might seem ridiculous or unnatural to certain borrowers, they all have been designed as measures to protect the bank’s investment. The underlying mechanism of disbursement (handing out money) implies mixing the loaner’s investments with the ones made by the customer so that both parties have the same interests of success at heart.
Once your loan application file has been approved, you won’t receive all the funds upfront, but gradually at the pace of the building process. Unlike the case of other types of mortgages, the amount of cash offered through a construction loan is established based on the value of the completed house project instead of the worth of the home today.
Structuring the construction loan as a credit line, banks offer the borrower a credit card with a large available balance which can be used to withdraw money when needed. However, the loaner gives the customer access to these funds only after the former makes sure that the latter meets certain conditions and that the respective person is using the money to pay the proper people to do the proper job on the custom house project.
After establishing a loan-in-process account, which includes all the items that the borrower accounted for the budget, the bank leaves the homeowner to find the method and timing for distributing the funds. The general rule of this entire “mechanism” resides in that the bank usually provides money after workers have done their job (with the exception of deposits for materials). This implies that the project owner has to furnish proofs of payments or completion in the form of inspections and maybe receipts before the lender hands over (or disburses) the funds.
So how does a bank from Arizona, let’s say, know that its customer, who lives in Ohio, is doing what he is supposed to do with the lent money? The answer is simple- the former sends a field inspector to check whether the building process is carried out as required. Working directly for the lending financial institution or hired by it as a third party, the field inspector visits the construction site and physically inspects the progress of the work. Therefore, you need to successfully “pass” these examinations in order to keep receiving cash from your creditor.
The good news is that few of these inspectors have extensive experience in construction and you, as the contractor, might often be more informed than them. This is why it is recommended that you and the appointed field inspector walk the property together so that you can present the project through your perspective. Don’t leave the examiner to his opinions because he might jump to conclusions which can be detrimental for you. It is your duty to ensure the bank’s delegate that the payments are in sync with the project’s progress.
Another important aspect of the case in which you are working with a bank resides in that discrepancies might occur between you and the lender. What you have to keep in mind is that you need to avoid disputes resulted from differences of perspective and that everything should be seen the bank’s way. After all, the lender has no obligation to support your project and, moreover, he has the same interest as you- completing the house in a timely manner.
All in all, both alternatives feature their advantages and disadvantages. Analyze and determine which of the two solutions, whether the self-funded house project or the bank-funded type, fits you best and try to heed the observations made in each case.