Well, that may be how it used to be done and nothing says it can't be done that way now, but in today's building economy, I might err on the side of caution. Alot of builders are hurting & some are behind in payments on other projects. You are going to want to do everything you can to protect yourself & your $$$.

As far as the construction loan goes, if I'm not mistaken, you and the builder would get roughly the same rate on the construction loan so there's no savings to be had there. The "savings" he is likely talking about comes from the fact that he is making the monthly interest only payments & you're not having to front that every month as the house is built. But trust me, he will get that money back with interest--so there's really no savings at all and it will probably end up costing you more.

If you get the loan yourself, you will be responsible for paying the monthly payments. (Average construction interest in my area = 5%. To figure your payment-which will change monthly-you take the total amount drawn off the construction loan to date, multiply by the interest rate & divide by 12. It's not until you get toward the end of the build that the payments really get up there, but remember you are still only paying interest-no PMI, taxes, or prinicpal).

As far as that 15% downpayment goes, depending on the type of contruction loan you get, you may have to front that 15% to the bank and they would make those funds available during the draw process. This helps protect you & the bank as the builder doesn't have direct access to the funds anytime he wants it--the bank will have to come out & make sure the work has been done to a certain level/percentage of completion and only then can the funds be released. There are typically 4-6 draws on an average construction loan.

From the builders' point of view, if he gets the loan & you front him the 15%, he knows he has funds readily available so he can pay subs and stay ahead of the game and not have to wait on the bank. It may also allow him to get discounts from the subs on labor costs if he pays them in cash from your 15% as the job is done or on a weekly basis. My question here would be--will those savings be passed on to me as the buyer?

What type of building contract are you going with--cost plus, fixed price, etc? If I was putting my 15% up front then I would want control over it--I get a copy of the invoice (sent US Mail) & I cut the check to the sub directly. As you submit receipts to the bank, those funds get "replenished". There have been too many cases where the builder uses the funds for something else and subs don't get paid in a timely fashion or even at all resulting in a lien against your house. Now I'm not saying your builder would fall into this category, afterall I don't know him. But it just makes sense to be cautious expecially in today's climate.

I would be very curious to know why he "wants to move super quick to get things started (something about a permit possibly expiring)". Does he own the lot the house will be built on? If not, what permits has he already pulled on a build he doesn't have a signed contract for yet? This doesn't make sense to me. If he doesn't own the lot, he may just be trying to rush you into a decision. My advice is don't rush into anything. Make sure your attorney reviews any & all contracts the builder wants you to sign. Make sure your attorney and his attormey are not one & the same--you need your own to protect your interests. Make an appointment to talk to some different lenders in your area about your loan options and their requirements-don't let anyone pull your credit report until you know you're set & ready to pull the trigger-no sense in dropping the credit score prematurely which can adversely affect your interest rate. While you're talking with the lenders, ask if they have dealt with this builder before or have had clients who used this builder and what their experience was with him. (I didn't know this one until the other day when my lender said he was going to ask around his banking friends about our builder to see if he tends to run over budget on his builds--sign of lowballing the bid to get the contract then springing the real cost on you at the end when it's way too late, differences of opinion on what is owed him, any complaints from subs not getting paid, etc).

You may also want to do a search on GW about building contracts--there is alot of great information on here with specifics on how you can help protect yourself & your pocketbook. Make use of your banker & attorney to help protect your interests as well. Good luck to you & congratulations on starting a new house!

I never gave my builder ANY money until the framing was complete. I would hesitate to pay anything up front, and don't quite understand if you are building on his dime, how are you going to pay HIM back? I don't think my construction loan cost very much up front, I paid closing costs when it converted to a 30 year fixed. One closing only.

If the builder is the one getting the loan, what's the collateral for that loan? Is it your house?! Obviously you would want to make absolutely sure that his bank didn't hold the mortgage on your house or have the ability to put mechanic's liens on your house or whatever. You would have to be extremely careful about what documents you sign.

The other problem I can imagine with letting him control the loan is that from a practical point of view, he can spend that money on whatever he wants. He doesn't have to spend it on YOUR home-building project. (I mean he does legally, but not practically). What if he spends it trying to keep his business afloat, but goes out of business before your house is done? Personally I would rather control the loan myself, and dole out the money to him as phases of the project get completed, with a substantial holdback for the final payment to be made when it's all done.

Unless you are having problems with financing I wouldn't go with your contractor. Two reasons: 1) being that if you have a construction loan with a 20% down payment you will not start drawing interest on that money until you use it all up and then start drawing on your construction loan. Depending on your contractor and how fast they are you could save yourself 2-3 months interest. 2) I had a friend do the contractor financing and they didn't get an apprasial before they started building and when the build was complete there were no comparisons in his area. Had they gone with a bank they would have known about this before they broke ground. They had a big suprise at the end that they had to come up with a lot of extra money. Do not let your contractor rush you!!
Make sure you put 20% down. Don't pay extra for Mortage Insurance. Banks get enough of our money!!
Also if you are having trouble with financing go to the small banks and go local. We were approved in 3 days with a local bank and the large bank said it would be two months with all the red tape.

the builder says not taking out a construction loan will save us money. Although this is partly true, we think it would cost him more money and why would he do this?

As pointed out in the first response, there are so many things about this build that we don't know--cost plus, fixed price etc., even who owns the land--that any suggestions here are mainly guesswork.

That said, as a builder, I supervised a custom home under a management contract a couple of years ago that would have gone much more smoothly had the owners taken my offer of financing. Even though my rates were higher.

There were frequent problems and delays from a number of causes: disagreements between the bank and the owners on the amount of progress; substantial holdbacks from each advance; late advances; high fees for inspections and appraisals at each stage; and frequent bounced cheques by the owner to trades and suppliers. The last was a lesson to me. These were people that I got on the job because they know my word (and cheques) are good. And here I was passing on a client's rubber cheques.

At one point, to keep construction going, I paid out several trades myself. Rather than taking my offer to finance the balance of the construction, the owners sought out another lender while I shut things down for nearly two months.

In your case, obviously the builder will work the cost of financing into his price. The fact that he can do this indicates he is well capitalized.

It's good to hear you plan to nail all these negotiations down with your lawyer prior to starting.

Several years back, we had a builder who also wanted 10-15% upfront on a 350k build. We had given him $1000 earnest to hold our lot for us. That was the best $1000 dollars we ever lost as it could have been so much more. He was using downpayments from clients to finance other ongoing projects. When his game of using Peter to pay Paul ended and he declared bankruptcy, he had one homeowner who paid the downpayment and got nothing, another who had already closed on their final mortgage and moved into the house when they started getting liens from all of the subs he had not paid, and many others in various stages of loss.

We are currently building and chose to get the loan ourselves on this house ... we are doing a cost plus a fixed fee, we own the lot, and had a good bit in savings plus an untapped Heloc to draw against to fund the beginning of the build. We use our own funds to transfer the bullding costs into his account each week (we have a joint account with the builder that we can each see online - we transfer from our private account into joint, then he transfers out of joint into his own private account - the tranfers are instantaneous - in between transfers, we only keep $1 in the joint account). He pays the subs directly and provides us with lien waivers. As different stages of the build are done, we get a draw against our construction loan to replenish our funds. We are ahead of the game and do not have to wait on the bank.