We Have Our Home-Construction Loan! How Do We Use It?

Reader Contribution by Jennifer Kongs
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The Small Home, Big Decisions series follows Jennifer and her husband, Tyler, as they build a self-reliant homestead on a piece of country property in northeastern Kansas. The series will delve into questions that arise during their building process and the decisions they make along the way. The posts are a work in progress, written as their home-building adventure unfolds.

I’ll admit that signing our home construction loan gave me cold feet about this whole house-building process. Are we sure? Are we making the best decision? Are we right to commit to paying so much? Tyler calmly reminded me that we decided long ago that we’d need a home mortgage to realize our rural-living dreams. We have no bigger goal in life than to operate our homestead, and so the investment is definitely worth it. (And, now that we are contractually bound to the decision, we can leave these philosophical debates to the past … )

While not necessarily riveting, I think anyone who takes out a construction loan to build a home would benefit from knowing how our process is set up. Tyler was familiar with the process and so he helped me understand as we went along, but without him, I would have been a bit lost.

We basically have a checking account of sorts, and a book of checks for that account that we’ll use to make payments from the loan to anyone who bills us for labor on our home construction. (Interesting tidbit: Each check is stamped on the back with a payment-in-full note to prevent any subcontractors from claiming lack of payment and, thus, placing a lien on the property. And, if you’re like me and not totally clear on what a property lien is, it basically is a legal claim on the property to secure payment of a debt.) At the end of each month, our contractor will send us a set of invoices we owe to any subcontractors who have completed work during that time period. We will approve the invoices and submit them to our loan officer, who will then make a loan disbursement (transfer funds into our loan’s checking account). We write the checks for that month, and then wait for the next round to repeat the process. The construction loan will terminate at the end of one year from the finalization of the loan, which means we have until May 2016 to build our house. We’re really hoping it won’t be that long!

The initial withdrawal will be automatic in order to cover all sorts of random fees. The county, state, title company, and appraisal company all take what they see as their fair share before we even begin paying the contractor or subcontractor for any house-building work. It accounts to several thousand dollars.

The interest on the amount of the loan disbursed will also be due each month. As the building process continues, then the amount of the loan that’s disbursed will go up, which means this interest payment will go up. This will serve as its own incentive (as if we needed one) to complete the process and consolidate the construction loan into a standard house mortgage with a lower interest rate. That consolidation will happen whenever we’re through with construction, but as noted above, no later than a year after we officially created the construction loan account.

How does this process work when we hands-on folks shop for our own materials to build some parts ourselves? We can turn in any approved receipt to the bank, even if we paid for it out of our own pockets. Ideally, we’d keep these expenses out of the loan when possible so that we don’t have to pay them off with interest later. Those are decisions we’ll make along the way.

Right now, as we’ve never seen the money that’s being exchanged and really never will, we almost feel like we’re playing a real-life game of Monopoly. The first month’s check will be a doozy, as we had the concrete poured for our basement walls along with the driveway work completed. What’s this? Concrete was poured? Why, yes, you can see how it’s coming along in the photo above. Stay tuned for next week’s update on the beauty of our basement/future root cellar/future storm shelter.

Photo of poured concrete basement walls by Jennifer Kongs.

Next in the series:Basement Construction: Choosing a Concrete Foundation
Previously in the series:Homestead Planning with Bonus Morel Mushroom Hunting

­­­Jennifer Kongs is the Managing Editor at MOTHER EARTH NEWS magazine. When she’s not working at the magazine, she’s likely in her garden, on the local running trails or in her kitchen instead. You can connect directly with Jennifer and Tyler by leaving a comment below!