New Construction Home: Pay Cash vs Construction Loan

7 years ago

My husband and I are in contract to build a house on a lot that we purchased with cash. We are ages 53/54 and about 6 years from retirement.

We are considering whether to pay cash or take out a construction loan. With either scenario, the builder would be paid in 5 draws based on specific parameters of the project being met (foundation poured, framing, drywall, etc.)

Cost of Lot: 153,000
Cost of House: 584,000
Total: 737,000

Equity in current house: 400,000

I have only talked to our current mortgage lender so far. That bank offers a construction to permanent 3/1 ARM at 4.375% plus about $4500 in closing costs. Since we have the full amount in cash at Ally Bank, we feel that it makes no sense to finance the construction loan considering the interest rate and closing fees. We can pay the full amount of 584,000 to the builder from our savings account and still have 275,000 left in an emergency fund. Then when our current house sells, we will recoup 400,000 which can be placed in CDs/Bonds.

If we do pay cash to the builder, we are wondering what safeguards we need to protect ourselves. These are some of the items I can think of as of now? Open to any advice

1) Obtain Cost Sheet from builder? We have our contract, plans and Spec Sheet but the bank would require a "builder cost sheet" for financing so wondering if this is something we should obtain if we are providing our own financing.

1) Hire our own inspector to inspect work prior to each draw?

2) Do we need to worry about obtaining Lien Releases for the subcontractors?

3) Do we need to purchase additional title insurance other than the initial title insurance when we closed on the lot?

4) Do we need to involve a real estate lawyer? We've already signed the contract so I don't know what value a lawyer would add at this point.

5) The builder is requiring a letter from our bank stating that we have sufficient funds to satisfy the contract price. Should we ask him to provide us with any documents proving that he has sufficient capital to pay his subcontractors. The builder has a good reputation and we trust him but just wanting to make sure we protect ourselves as well.

Any other advice from people who have paid cash for new construction?

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Comments (4)

Denita
7 years ago
You absolutely need a real estate lawyer that is familiar with construction contracts and lien law. Did you have an attorney draw up the contract or did you use the builders contract?

It is critical to get lien releases from subcontractors. Discuss this with the real estate attorney you hire. Do not use the same attorney the builder is using. Get someone that is knowledgeable and that represents buyers/homeowners and not builders, There is a tremendous value to having an excellent real estate attorney represent you right from the beginning of this process. You are already behind the 8-ball having signed a contract without an attorney (IMO). Please get an attorney before you do anything else.

Yes, to an independent knowledgeable inspector.
baseballmom94 thanked Denita
homechef59
7 years ago
Yes to your own RE attorney. Yes to a methodology of lien release tracking. Yes to setting up a construction draw schedule even if you don't have a loan. Your builder should know when he needs draws and design a schedule for you.

Planning is everything. Know what you want and stick to it.

Strangely enough, once the foundation is dug, a lot of risk diminishes. If there are no rocks or water, your foundation costs drop off.

Shop around for other lenders. You only need a construction loan. Not a construction to perm. They are different.

It's good to have a line of credit in your back pocket when building. I suggest you explore a home equity line of credit on your current home. If you need it, you have it. If you don't use it, you were prepared.

Lenders will love you. They love to lend to people who don't need the money. And, they love lending to people who already own the land. Expect and prepare for cost overruns. Construction lending is high risk and you are lowest level of risk of a high risk endeavor. Make the lenders compete for your business.
baseballmom94 thanked homechef59
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homechef59
7 years ago
I reread your questions. No. You don't need additional title insurance. You will need a policy that covers the construction and materials on site. This is specialty insurance.
cpartist
7 years ago
Actually not a RE attorney. Get a construction law attorney.

In reality, our bank has saved us because they made sure there are no liens and working with us, refused to release funds until they got our ok's. Additionally their formula required the builder to agree to something like 10 draws versus the builder's 5 draws.

One other thought. Look around to see if you can get a better rate. We got a 10/1 ARM at under 4%. Granted our rate is 2 years old but our money was better left in our mutual and ETF funds where they are growing at a higher rate than the loan amount.