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Construction Loan Horror Stories: What Are the Most Common Ones?

2024-12-08 07:33
2024-12-08 08:56

A typical construction loan horror story is the contractor running off with the money. They take the initial payments from the loan but then disappear without completing the work. This leaves the homeowner in a bind as they still have to pay back the loan but have no finished construction. Another issue is miscommunication between the lender and the borrower. The borrower might think the loan covers certain items like high - end fixtures, but the lender has different terms. And there are cases where the appraisal value of the completed construction is much lower than expected. So the borrower can't get the full loan amount they need for the next phase or to pay off the loan, leaving them scrambling for funds.

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One common horror story is cost overruns. Contractors might discover unforeseen issues like bad soil conditions during construction, leading to extra expenses. For example, if a building's foundation needs to be redone due to soil not being stable enough, it can blow the budget. Another is delays. Permit issues can hold up a project for months. Say the local council has new regulations and the construction loan doesn't cover the extra costs to meet those regulations, it's a nightmare. Also, some borrowers find that the interest rate on their construction loan suddenly spikes due to market changes they didn't anticipate, making the overall cost much higher than planned.

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