Great Urban Myth #1 in the Construction Loan Industry.
You can get a lot loan that "rolls" into a construction loan automatically.
Debunking the Myth:
Borrowers that hope Myth #1 is true usually want two things. They want construction loan rates (which are lower than lot loan rates), and they only want to go through the loan process one time with one set of closing cost.
This all sounds good, but a problem arises because generally, borrowers who are buying a lot do not have plans, a contract with a builder, and a cost breakdown by the time they need to close escrow on the lot. Construction lenders will not fund an open-ended, loan-amount-and-appraised-value-to-be-determined-later construction loan. The only extent to which a lot loan "rolls" into a construction loan is that it is paid off by a construction loan when the construction loan is funded, usually by a different lender.
Great Urban Myth #2:
I can get a construction loan to do most of the work (through drywall for example), and I'll do the finish work myself.
Debunking Myth #2:
Lenders will only do a construction loan for a complete house. You could leave such items as landscaping, a swimming pool, finishing a bonus room, a security system, and ceiling fans out of the project, if these were accounted for in the appraisal. You can not leave out the cabinets, a driveway, appliances and floor coverings (though you could put down vinyl to be ripped up later). You have to have a garage door, but not necessarily a garage door opener.
The reason for all this is that a lender's nightmare is that you stop making your payment. A lender's worst nightmare is that you have stopped making your payment and the lender has to find a builder to finish the house. This is why they'll have your builder sign a form that says if you stop making the payment and they have to foreclose (trustee sale in California), the builder will finish the house for the lender so it can be sold.
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