Banks: Taking Everything and Giving Nothing
Bad news. After reaching terms with the bank, they’ve gone back on their initial commitment. The first terms were not favorable, but if I held my nose, I could tolerate it.
The new terms are just abysmal. They’ve increased their fees to 2 points, are requiring all sorts of new documentation from the builder, and want to up our rate from 6.5% to 8%. All this and they hold the lien on the house - if anything goes wrong, we lose everything.
After some consideration, I made the decision to stop pursuing business with this bank. This was a tough call because we don’t really have any other options. As much as I wanted to make this project happen, it just didn’t make any sense. Here’s why:
Our project costs roughly $165,000 to build. Our current home is worth just over $250,000. In order to loan on the construction phase, the bank requires that that hold first position on the property. This means that they want to buy out the existing mortgage (to protect themselves in case of default) before loaning on the new building. So while it would SEEM like we need to borrow $165,000, when you add in the existing mortgage, interest reserves, bank fees, title, so on and so forth….you get to a “loan” of $447,000.
Since the appraisal of both properties came in at $485,000, the most the bank will loan is $364,000 (75% of the appraised value of the property). The difference between this amount ($364k) and the TOTAL project cost ($447k) is what we, the owners, have to come up with in CASH (just over $80,000).
I don’t know about you, but it’s a little CRAZY to come up with $80,000 in order to get a loan for a project that’s $165,000.
Still, I was willing to give it a shot. I don’t have that kind of scratch lying around, but I do have some savings. Plus, I have a business with a substantial line of credit and some cash reserves. Last, but not least, I had a dear friend who was willing to loan me $30,000 to make up the rest.
It was a stretch, but I could have done it and met the bank’s insane demands. When they changed the terms, it was still possible…
But the reality is what the bank was asking was just too much, and for a cost that was disproportiante to the risk they were willing to take. Calling the current lending climate “unfriendly” would be an understatement at best. It’s a stark example of how the credit crunch is grinding our economy to a halt.