I feel like an Idiot, but I'm Going to ask Anyway....

[Anonymous]

Hi everyone! We're very slowly making strides toward closing a new construction loan, but the process has been pretty slow-going. We were approved by our bank and signed/returned our conditional commitment letter. The appraisal has been paid for, and now we're just waiting for the appraisal to actually happen to see if everything goes well.

My question is this, and maybe it's crazy but our letter has a ton of legalese in it, as you can imagine:

A part of the letter mentions the obvious, that we cannot incur any more debt or borrow any more money with a few exceptions. One of the exceptions mentions that we can assume "additional indebtedness incurred in the ordinary course of business not to exceed $10,000 at any one time outstanding."

I assume this would mean we could "finance" additional costs from the builder or anything outside of the original loan amount as long as it's related to the construction of the home (or things like permits, etc). But here's my other question:

Does this $10k amount possibly also pertain to a situation where the home doesn't appraise to where they want it? In other words, is this allowing us a possible "cushion" to finance a $10K difference or less? Technically it would be debt as part of the "course of business" but we just don't know what it means.. We're new to this construction loan world, and it's definitely something I've never seen before.

Thanks as always for your insight!  

[CreditInspired]

I’m not an expert but I’m going to give an answer from an inactive Realtor’s POV. 

First, one shouldnt want to pay more for a house than the appraised value. In the early 2000s, this happened a lot with multiple contracts and escalation clauses in bidding wars on homes for sale. Purchasers paid the difference just to get the home they wanted. Then, 2006-2008 happened, and so many homeowners were SOL because they paid more for their home than it was worth. Of course, this wasn't the only reason for the crash—subprime mortgages, income only mortgages, and ARMs were also the culprits. So, no, in a nutshell, don’t pay more for a house than it appraises for. 

Now, to answer your question. I do not believe that “up to $10K” can be used to finance the difference in the sales price and the appraised amount.  

And this was not an idiotic question. How else would you know if you didn’t ask?

So, hopefully some of our mortgage experts will be along shortly to provide more specific info. 

[Anonymous]

Thank you! I'm all-too-familiar with the whole "why" they need the new home to appraise at a certain LTV, but I think maybe that clause was some wishful thinking on our part. We should've known that any additional debt they're referring to doesn't mean financing through them but rather any additional debt outside of that needed toward the building of the home, etc etc. that we'd take on in another format.

Anyway, our appraisal was paid for last week, and they said it was projected to be done by this Friday, so all we can do now is wait and see. Wish us luck!