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Started By
Message
Can someone help me understand how construction loans work?
Posted on 4/3/24 at 7:29 pm
Posted on 4/3/24 at 7:29 pm
This will probably make me sound like an idiot but I am new to the game and trying to figure it all out.
I've asked my LO but was not satisfied or didn't completely understand her answer so rather than asking more dumb questions to her, thought I would throw some "dumb" questions on here.
Okay here's the deal. I'm about to build a spec home that should make a nice profit. Fwiw, I own the lot I'll be building on already. this bank offers 85% financing and payments would be interest only during construction.
What I am confused on is-
Will I have to put 15% down to get this construction loan, or would that be due when it converts to a mortgage loan? Or neither.
This was her answer-
we can allow you to borrow 85% of the appraised value, which will include the value of the land and the estimated cost of your construction.
So to those with more knowledge- Is this just like a line of credit and rather than me putting anything down to get it, I would simply pay out of pocket if construction costs run over? And if we can build it with the amount that the bank gives me, I'd essentially not be out of pocket any money?
I've asked my LO but was not satisfied or didn't completely understand her answer so rather than asking more dumb questions to her, thought I would throw some "dumb" questions on here.
Okay here's the deal. I'm about to build a spec home that should make a nice profit. Fwiw, I own the lot I'll be building on already. this bank offers 85% financing and payments would be interest only during construction.
What I am confused on is-
Will I have to put 15% down to get this construction loan, or would that be due when it converts to a mortgage loan? Or neither.
This was her answer-
we can allow you to borrow 85% of the appraised value, which will include the value of the land and the estimated cost of your construction.
So to those with more knowledge- Is this just like a line of credit and rather than me putting anything down to get it, I would simply pay out of pocket if construction costs run over? And if we can build it with the amount that the bank gives me, I'd essentially not be out of pocket any money?
5
Posted on 4/3/24 at 7:51 pm to Random MsState Fan
I've done this a couple times. If you own the lot you are only going to be making interest payments on the loan. They will disburse money in phases as the construction goes along, so interest payments won't be much at first. I believe its 4-6 phases depending on the contractor. After slab, framing, rough in, etc they will send you a lump sum to pay contractor. Since you own the lot, they will loan you 85% of the appraised finished product, depending on land value and cost of construction of course. So if land is worth 100k and construction is 300k you will get a loan for 340k, which means no out of pocket. Hope this helps
Posted on 4/4/24 at 5:58 am to Random MsState Fan
Other answers have told you correct. Couple pieces of advice. First, if this is truly a spec tread lightly. With interest rates today those holding costs will eat directly into your bottom line so you need to build/sale quick. Second, have a chunk of cash in hand when you start so you can cash flow each phase. For a $170K build I’d want maybe $20K cash. This allows me to pay off one sub/material/phase and roll the next in there and not have to wait on the bank. Do some math with your interest rate/borrowed total and you’ll quickly realize that each day of delay is costing you hundreds of dollars.
Posted on 4/4/24 at 7:42 am to Random MsState Fan
What would his payments to the bank look like?
Using the above figures, will he be paying interest from day 1 of the loan on $153K (even though he hasn’t received that amount yet)?
Using the above figures, will he be paying interest from day 1 of the loan on $153K (even though he hasn’t received that amount yet)?
Posted on 4/4/24 at 8:13 am to Random MsState Fan
Some great info in here and I really appreciate it. To circle back to my original post- Am I correct in assuming I won't have to put anything down to obtain the construction loan but would have to pay out of pocket for any work after the 153k (example number) is used up?
Posted on 4/4/24 at 9:05 pm to Random MsState Fan
The equity you have will suffice for down payment in most cases. Appraised value minus costs will be your down payment.
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