How to declare a construction loan default?

Hi Dolphin Fan,

Welcome to the forum.

I think you should inform this to your lender ASAP. As it is not your fault you may get some consideration and the lender may work it out with you.

BTW you should have the surety bond. Now you should consult with an attorney.

Best of luck,
Larry

Hi Dolphin,

Why did the builder stop the construction? There must be some reason. Did he say something? You have every reason to file a lawsuit against him. But did you take help of any real estate/mortgage attorney for the filing?

The builder hasn't offered the surety bond perhaps because he wasn't sure of completing the construction. Had he provided it, you would have been able to force him to complete construction as per the contract.

Why would you declare a default on the construction loan default? It's not that you couldn't pay off the loan isn't it? The fact is that, the builder stopped construction and he needs to compensate for any loss incurred by you.

I suggest you inform the lender asap and then if possible request him to extend the repayment period so that any legal action against the builder can be taken meanwhile.

Good luck

Thanks for the information. After consulting a real estate attorney and reviewing my situation, it turns out the builder received 100% draws for work that wasn't 100% completed authorized by the bank. So, most likely the builder ran out of money and stop work on the house. At this point, we moved on to another home and want to get out of the note with the bank. Since, they contributed to the problem we might be able to get to get good terms from them.

Dolphin, you mean the loan amount you received wasn't enough to cover the construction costs? so now if the constructution is left behind, don't you think your money is wasted? let's hope that you are able to get out of the note asap!

I have $650,000 construction loan and have drawn about $520,000 but in order to complete the house will need about $50,000 to $75000 more. I am current on my interest payments but do not have any incentive to complete the house because it is costing too much and I cannot sell the house due to the downturn in the market. What can the bank do? They sent me a certified letter asking to pay the full $650,000 or they would start the foreclosure proceedings!! I do not understand this becasue I only owe $520,000!!?

Hi Vin,

The bank has all the right to foreclose the property if you cannot pay off the debts. As you are unable to pay off the debts, it will be better if you can contact the lender and inform him about your hardship. There are chances that the lender may give you some other repayment plan. As you have taken only $520,000 from the total loan amount, you should inform the lender about this and clarify the issue.

Thanks,

Jerry

We have a construction loan for $440000. We are doing the construction ourselves, we've already tapped the $440000 and the house isn't finished, still needs carpet and appliances. The bank of course doesn't want to lend us anymore, and we have been unable to pay the interest on the construction loan for a year now. What can the bank do to us? If the bank forecloses and takes the property, do we still owe them $440000? Do we owe the interest? Will we be forced to add $440000 to our income taxes? Thanks Sam

if you default on the loan (and you have already, actually, by not paying), the bank can begin a foreclosure action and ultimately take possession of the home. they'll then try to sell it for as much as they can. it's possible that they'll seek any deficiency from you, or report that deficiency on a 1099 form to the irs, in which case you'll pay taxes on it. it won't be $440,000, of course.

a specific answer to "do we owe the interest" question - of course, yes. once they take possession, however, your debt cannot increase.

Thanks George. I'm trying to prepare and determine possible outcomes. Do you think the interest that we have not paid would also be added to a 1099 or is it more likely the bank would try to collect this from us and or turn that portion over to a collection agency?

honestly, that's anyone's guess. they'll take the money any way they can.

I have a loan out for nearly 200k. Construction started June of 08. Contractor made a mess of nearly everything from excavation to rough-ins and everything in between. I stopped the progression after the electric and plumbing rough ins due to poor workmanship from the contractor. Over spending, charging for mistakes, charging again to repair mistakes. At this point the budget is so blown out I don't think the home can be finished for the remaining moneys. Pre-mediation with the bonding company and the contractor have proven futile. Bonding agent is not willing to step up and make good their bond. Bank is sympathetic but is exercising the option to let us sort it out. I'm now only a month behind on my interest payments but I face the options of letting the contractor finish or default on the loan. It seems a common thing here in Hawaii to get the shaft on the building process. I have tried everything including offering to pay for half of the damages out of my own pocket. I have also requested another contractor take over the project but his bid is 30k over what's left in the budget due to miss-management of funds from previous contractor. I do not wish to take him to court I wish the bonding agent would make good the bond and cover damages. There are some specific issues with the unconventionality of the building materials being used but I feel that since the bank put up the money, the bonding agent put up the bond and the contractor has accepted the work there should be no problem in finding fault here. Alas it all falls into my lap and now am considering bankruptcy. I want to close my eyes and make it go away. Help.