Disbursements with rehab loan

katie8422September 8, 2008

Hi friends,

I'm new here. My boyfriend and I are closing on our first home on October 20th. We're getting a Fannie Mae Homestyle Rehab Loan. We're wondering how the disbursements will work. We'd like to bargain shop and use Craigslist to buy some materials, like our kitchen cabinets. If we were to find the cabinets we want on Craigslist, do we buy it out of pocket, or is there a way to get that money from the loan, or do I ask the contractor to pay and tack it onto the final bill? Anyone have any experience with this?

I'm sure I'll be around with many more questions in the coming months. :)

Thanks!

Katie

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lucy

You need to ask your lender for specifics like that. I would 'imagine' you could buy what you want and just pay off the loan instalments, but every one is different so don't take my (or our) word for it!

    Bookmark   September 9, 2008 at 12:00PM
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newenglandbuilder

Make sure you have the answer to this prior to making up your contract with a contractor. Frankly, as far as I have had experience with construction loans (which this may or may not be) the bank wants to pay the contractor directly, with you as the co-signor. They want that money to be re-invested into the house and they also want to make sure that the contractor gets paid to avoid any possible lien issues down the road. They also want the project managed professionally to ensure proper timeline conformance as well as oversight and proper management of other subs if necessary.

Also, many banks are loathe to allow homeowners to do their own work on a project they've financed; they want the job done correctly as they don't want to foreclose on a house with full of DIY hack work (no offense to you personally).

If you don't get this settled and go into a contract thinking that you can purchase the materials and the contractor will happily install them for you, you may be in for a big surprise.

Many contractors rely on their buyer's discount as part of their margin and if the homeowner attempts to cut that out of their pockets, they may either refuse to continue or may perform poorly in the long run. Worse and I've run into this more than once, is the fact that some products or materials may be better for a project than what the homeowner believes would be. Frankly, as a contractor, when I'm doing the work and am responsible for the final product, I prefer to choose what I'm going to be working with -- I'm the one who will end up working with it anyway. If a product has a bad reputation for quality or workability, or availability, the contractor may not be so thrilled to work with it.

I had a contract with a person who wanted to purchase their own materials. The bank wanted to disburse payments directly to me. I was a nice person and wanted to work with the homeowner, so I agreed to allow her to purchase on her credit card what she wanted to use, with my oversight and then I'd reimburse her after each phase.

To make a long story short, I wasted over 60 hours running from store to store with her looking at product and helping her to make up her mind. Then after the first phase she decided to change her mind and started purchasing materials not included in the budget. I had to back out of the project as she was spending far more than the contract budget allowed and I could see no end to it.

I heard from others that she hired an inferior contractor to finish the work and in fact she tried to come back and sue me for their inferior work, blaming me for leaving the contract early. This was a nightmare that lost me a lot of money, wasted my time and made a very unhappy customer on my past customer list.

I'm sure most people wouldn't have acted like that woman, but as you can see from the example above, this can happen and banks don't like it.

So, if you have to disburse directly to the contractor, make sure at least you have to co-sign and an inspection is conducted after each phase.

Make sure you have some input on product and know what the contractor likes to install and see what they recommend. Find the contractor you feel most comfortable with. Be honest with them and once you've signed the deal, that's it, stick with it and you should be fine.

    Bookmark   September 10, 2008 at 11:46PM
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