How to make a family mortgage work with a construction loan to ensure the complicated building process doesn’t exceed the loan amount.
Q: In regard to your article “How to become a mortgage lender for your children” in the Washington Post, can a family mortgage also be accomplished on a construction loan? Can you refer me to someone who can handle the documentation?
A: Thanks for reading our columns. The column you referenced was about parents selling their home to their kids and giving them the financing to complete the transaction. In other words, the parents became the lenders and the kids owned the home and made their loan payments to their parents.
Your situation is similar. The only difference is that your kids would need not only a loan for the purchase of the home but that same loan would have to have provisions relating to the construction of the home. Most people are familiar with traditional home loans. You go to the bank, put in the paperwork, the lender goes through all the paperwork, approves the loan and then you close on the home and loan at the same time. Once you own the home, you make the monthly payments on the loan to the lender.
Construction loans are a bit more complicated. When you give someone a construction loan, both the lender and the borrower have ongoing financial responsibilities that require constant attention. The borrower needs to monitor expenses and charges from contractors and subcontractors and the lender needs to undertake its own due diligence with those same contractors and subcontractors.
While the lender and the borrower’s interests are somewhat parallel, the lender wants to make sure that the contractors, subcontractors and suppliers do not place any liens on the property that could affect the mortgage that the lender has on the home.
While the borrower is making sure the work is done right, the lender also wants to make sure the work is completed properly. Usually, the lender gives the borrower money to pay for the work on the home as it continues, and wants to make sure the work has been done correctly and completed according to the contract documents. This means that the lender needs to inspect the property to make sure the work is completed and the lender needs to inspect the invoices and payments to follow the trail of the money.
In short, construction loans are a lot of work. This leads back to your question as to who can help you in this endeavor. We don’t recommend individual practitioners, but you will need a real estate with experience in construction loans to help you out with the documentation.
The attorney should be able to draft the construction loan documents and also advise you on how to proceed with future disbursements on the loan. The attorney might suggest a third party to handle the review of documents from the contractors and subcontractors to avoid liens attaching to the property along with a title company that can issue a title insurance loan policy to you insuring your interest in the property as a construction lender.
To find a real estate attorney in your area, you might call the local bar association for a referral, talk to some commercial real estate brokers and ask them for a recommendation or ask friends and relatives for a referral to a law firm they have dealt with in the past (and with which they had a good experience) to see if they have an attorney capable of helping you through the process.