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I'm in the process of building my first home. While I have enough money in the bank to pay for the home straight up, I would rather take advantage of the record low interest rates and keep my money in other investments. So, naturally I'm in the process of getting a home loan.

In the construction agreement which is a precursor to the home loan there is a clause that says:

Borrower will not incur any additional debt, increase any outstanding loan or revolving credit line, or reduce assets from that shown on the Loan application.

How do I get this removed? It seems bizarre. What if I decide to purchase a new vehicle 5 years from now? I should have the freedom to take out a vehicle loan if I want to, but this clause basically states that I couldn't.

  • I would reconsider the loan altogether. As a homeowner with a mortgage, I would much rather have paid in cash if I had been able to. – Kevin Jun 14 '12 at 19:11
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Though I have never had construction loan, for a regular loan this clause only covers the period between when you submit the forms, and when you close on the loan.

Normally the construction loan is converted into a regular mortgage after the home is completed. The lender wants to make sure that you don't do anything that will make it impossible for the loans to close.

They are concerned about new or enlarged loans. They also care about spending the down payment money on something else. When I was selling my condo, the purchaser bought a new car the week before closing. That made closing very interesting.

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To add a little to mhoran_psprep's answer, the clause in question is not binding in perpetuity but only for the duration of the construction loan.

I assume that you are getting the loan from a bank rather than through the builder. The way a construction loan works is that the bank agrees to loan you a certain amount of money for you to pay the builder but you don't get the money upfront to hold till the construction is complete, or to pay to the builder each month. Each month, or whenever a major phase of the construction is completed, the builder submits a request for payment of (say) $X to you stating what part of the whole work has been completed and attaching lien waivers from all the subcontractors that did any part of the work that they have been paid in full. It is up to you to verify (for your own protection) that the work has in fact been completed and that the work is satisfactory. If everything looks OK, you send the request (together with the lien waivers) to the bank which sends its own home inspector to verify that the work has in fact been completed. After the inspector's OK, the bank pays the builder $X (more commonly $0.95X or $0.9X) and gets a lien waiver from the builder in the amount of the payment. At this point, the amount that you owe the bank increases by the amount paid. This goes on till the house is completed, the municipality or county issues a Certificate of Occupancy (meaning that that august body is satisfied that there are no building code violations etc. and the place is habitable) and the penultimate request for payment is made.
Penultimate because a good construction contract withholds some amount (5% or 10%) of the money owed to the builder for anywhere from three months to a year to ensure that the builder will come back and fix things that were done incorrectly but not noticed till the house was lived in. (For example, one drywall nail had penetrated an electrical wire creating leakage. This was not discovered during inspection - flip the switch; light turns on? yes, so flip the switch back and move on - but when the light was turned on for three hours after the house was occupied, an electrical fire began inside the wall!) So, after this settle-down period is over, the builder submits the final payment request and gives a final lien waiver to the effect that everything owed to him has been paid.

It is during this period of time that the bank wants to make sure that you don't take on additional loans or debts, or make any material changes to the facts that the bank used in assessing your credit-worthiness and making the decision to loan you the money. Hence the clause that is causing you to worry. Construction loans usually are at higher interest rates than regular mortgages so that once construction is complete, it is in your best interest to replace the construction loan (paying off its mortgage) with a regular home-owner loan and mortgage. If you get the regular mortgage from the same bank, you might be able to get some of the fees waived while going to another bank will mean that appraisal fee, termite inspection fee, etc will have to be paid. But in either case, the prohibition against buying that Beemer will disappear; just don't take out that auto loan between the mortgage application and the closing on the regular mortgage as mhoran_psprep's buyer did!

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