My commercial lender is having me pay for construction funds it hasn't yet disbursed to me yet. What do I do?

Question

Hi,I bought a home on a commercial renovation loan structured as follows. Before construction, the home was appraised for $80,000, and after-complete the appraisal value is $120,000. The lender was supposed to disburse 70% of the renovation home value improvement, or .7 x $40,000 = $28,000, in the form of up to 3 payments done after appraising the completion of each phase of the construction. During the construction process, the loan was to be interest-only, after which it would become a 15 year 5/1 ARM loan on 70% of the after-complete amount, i.e. $84,000.Now, because of bad weather and 3 months of unexpected construction delays (contractor found plumbing and electric issues so I had to wait for permits and fix them out of my own pocket), I only got reimbursed $13,600, for phase 1 of my construction. The remaining $13,400 I did not get reimbursed for. But as the original construction was set to be complete for 3 months, which was the interest-only loan term, the bank automatically converted my interest-only loan into 5/1 ARM on the full amount, without me having received any of the $13,400.The worst part is, my loan officer got fired from the bank and currently no one is responding to my requests to 1) get reimbursed for the amount of principal payment I've been paying them over the past 2 months for the extra $13,400 I haven't seen, 2) override the original 3 months interest-only term to a 6 or 7 month term so that the rest of the construction is complete and I get reimbursed for all phases of the renovations.I am frustrated with the way my lender is handling the situation and I would like to see what my options are if they continue to be unresponsive. Could I take the lender to small claims, and what is the procedure for that? I wouldn't want to pay thousands for legal fees given that I just want to be reimbursed for $13,400 and for any unnecessary principal payments. The loan was issued by a Southhampton, PA lender.Thanks

Michaela G. · Answer

Another thing to consider is : you are technically the one in breach of contract, because you did not finish the house in 3 months. So, creating a lot of hell with the lender can make them unhappy with you and the unfinished house that the lend on. You don't want them to start creating problems for you. Just saying........

Ivailo Dimov · Answer

Thanks, everyone. I straightened out everything with my lender and things worked out! I was worried that switching to regular ARM 5/1 has me pay principal that I haven't received. But it turns out any principal not disbursed to me yet is still on interest-only. Everything else is ARM. That point wasn't clear to me at first.

David T. · Answer

Sorry to tell you Ivailo, it's time to pick yourself up, dust yourself off and get on with it. This is a learning experience for you. Now you can have everybody on BP to help you with your next deal. If in doubt, post a question. Good luck with it.

Ryan Dossey · Answer

That depends how badly you need said funds. You didn't say what your plan for the home was. Are you going to owner occupy? Rental? If you put 14k you didn't have on credit cards and are setting yourself up for failure/collections you may have to re-evaluate your plan with the home. Try to flip it? Seems like you could make a good profit?

Jon Holdman · Answer

It is very common for borrower who get rehab money to pay interest on the full amount starting from day 1, even though they will not receive money from the rehab escrow until they get the work done and inspected.  That's the way almost all hard money lenders work.  I've done it exactly like this, both as a borrower and a lender.   I'm not surprised a bank works the same way.

The bank does not care about your delays.  It appears your loan was set up with a three month interest only period, then converted to the 15 year 15/1 ARM.  I suspect there's no provision in that loan for any delays.  That would have been something you would have had to address up front.  But it sounds like it was set up as three months I/O then convert to the ARM, and that's exactly what the bank did.  The status of your construction is irrelevant.

Finish up the construction, get that last increment of rehab money and move on.  You're not going to get those principal payments back.  Those reduce the balance you owe in any case.

Michaela G. · Answer

I know you're in a shitty place, but look at it from the lender's point of view:

They did exactly what you both agreed upon: They provided the loans and they agreed to the 3 months that the rehab should have taken. The fact that it now took longer is not their fault. It was up to you/your contractor to finish the rehab in 3 months and you did not perform.

Unless bad weather or other construction delays had been addressed in the mortgage package, I don't see them having done anything wrong.

The funds for the rehab are sitting in a separate escrow account just for the reimbursement of rehab stages.

I'm not a bank, nor have I done rehab loans, other than through HML, so, my response is only from the top of my head, based on what you wrote.

My commercial lender is having me pay for construction funds it hasn't yet disbursed to me yet. What do I do?

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