Construction loan financing question - amount of down payment required

Anonymous
I understand you need 25% down payment for a construction loan, but that equity in the property can count as part of the down payment. How much down payment would I need for the following example - just using round numbers:

I already own a $600,000 piece of property with a $480,000 loan.
Building costs associated with the new property totals 400,000.
Assume the house will appraise for $1.3 after the construction.

So, would I get a construction loan for $400,000? Or would I roll the whole thing 1 million ($600,000 plus $400,000) into a construction loan. How do you calculate the down payment required?
I am totally confused!
TIA
Anonymous
You would probably roll the whole thing and would have to come to closing with 25% of 1.3 million. You can't pull the equity out of your land because they won't let you do an equity line at more than 80% LTV, which you already have in your existing mortgage. You would have to see what they would take as collateral for the construction loan if you just tried to finance the $400K, but I would be surprised if they would agree to be a second lien behind your mortgage, in which case you need the 25% on the whole thing. But talk to the various lenders and see. Some might be more flexible than others, especially depending on your financial situation.
Anonymous
You will need it in liquid upfront. I know of one bank that will do 10% down with 10% liquid (essentially 20%)

The only way to do less down payment is a fha modular home with 2% down.
Anonymous
I am going through this now. Lots of banks will do construction loans with 20% down. One, Sandy Spring Bank, will do an 80-10-10 (but you'll need 10% in liquid reserves).

Your existing "lot loan"/"mortgage" of 480K would be wrapped into one loan for 80% of the purchase price of the lot (I am assuming 600K) plus the construction costs of 400K for 800K (80% of 1 Million). Since you have $120K of equity in the lot you just need another 80K plus closing costs.

Advice, for a lot worth $600K; 400K seems low on construction cost side. Keep in mind you'll need a sizable budget for demo (if a tear down) and all site work (grading, driveways, etc...) in addition to the house construction cost. Depending on location you're looking at on average $40K - $60K just in site work.

Now, I ran into one lender, can't remember who (sorry) that will loan you money based on the appraised value of the COMPLETED house. So if the appraised value is 1.3 million and you only need an $880K loan to pay off the lot loan and build the house that's well over 80% Loan-to-Completed-Value so you'd only need to bring closing costs; unless you roll closing costs into the loan, which should be doable, but generally not the norm.

Most, lenders base the Loan to Value on the purchase price of the land plus the actual construction costs.

Hope that helps!

Anonymous
Agree with pp -

they role up the value in one loan calculation. If you were to default, they can't have land and house separate. so even if you keep a loan, they put something in second posiiton.

Also per pp - those construction costs look extremely low - site, permit etc, are significant. your constuction docs as well as the actual builder will be reviewed critically and have to be in line with market. they also "appraise" the final build.

Equity and cash are counted differently. So will need more "equity" to have the same cash equivalent. and may need to be equity accessible (i.e. an equity line).

banks vary greatly - so you need to shop around.
Anonymous
Most banks will do the loan based on a completed value. However, unless you're extremely lucky, it is difficult to believe that you'll be all in at $1 million for a home worth $1.3 million - new construction numbers don't typically work that way unless you've owned the land for a long, long time.
Anonymous
Thank you for this help! To PP 00:30 Would you be willing to let me know which lender you decided on. Also, I am assuming you did not go with Sandy Spring. If that is the case, could you tell me why? Not liquidating my Janus on Schwab funds sounds really good to me.
Anonymous
00:30 here it is still a work in progress so I haven't chosen a final lender yet. I am working with Sandy Spring right now because of the ability to do an 80-10-10, but the 2nd mortgage is at a decently higher rate; and because EVERY bank will do a construction-to-permanent loan at 80% LTV I can shop for the lowest interest rates and best terms. So I will most likely just put down 20-30% plus closing and do a single loan.

As far as the house goes we're still in the design phase; once that's done we can settle on a final price, and begin the permitting process. Once we're ready to break ground we'll close on the construction loan and move forward from there. If you can pay out of pocket for everything through the permitting process then you can push closing on the construction loan until after you've gotten all of your permits and you're ready to build. Else, you could end up paying interest on the balance of construction loan while your permits sit in the District or County offices. Also, you typically have only a year to convert your construction loan to a permanent loan so if you want to build a McMansion (I'm probably the only person on the board that likes the idea of living in a new, spacious, energy-efficient home that's inside the beltway ) and your new neighbors cause a big ruckus and slow, or stop, your permits from being granted then you can take your time and work through all the issues without worrying that your construction loan will expire.

So we'll pick a lender a little later.

Just my 3 cents. Good Luck!
Anonymous
How do the payments work while its being constructed? Do they go up the more money thats dispensed to the builder?
rashadmoore
Member Offline
Anonymous wrote:How do the payments work while its being constructed? Do they go up the more money thats dispensed to the builder?



Correct. You can think of it as a HELOC that grows money is drafted from the account to pay for expenses related to building the house. It's typically an interest only loan, that then converts to a traditional loan (Fixed, ARM, etc...) once the home is built. Also keep in mind the construction loan will be used to pay off the lot loan, and the interest rate of the construction loan can be different than your current lot loan and potential permanent loan.
Anonymous
PP 11.46 - So Agree with you that you start the construction loan at the last possible moment. We have paid everything out of pocket. Permit, etc can take a long time - especially depending where you live . And agree, we worry on the 1 year with anything that can happen - we have seen neighbors slow things down (court over-rules them - but it hurts you interest wise). We researched it and After a year, an extension causes interest rate to go up.

Good luck everyone!
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