Construction loan alternative??

16 years ago

Hi,

We're first time home buyers with no equity and we have this crazy idea to build a prefab in Redwood City, CA.

We found a teardown (1 bed 1 bath) in a location that we like. We've made an offer and the seller accepted at 515k. We've been approved for an investment loan 30yr fixed w/20% down and just started the 20 day contingency period. During this time, our developer will give us a cost analysis on the construction of a new home. Based on this analysis, if the numbers don't make sense, we have the right to back out of the contingency. However, if the numbers make sense... we're probably going to need a construction loan to start the process.

The problem we're running into is that most of the banks that we've contacted are offering a LTV between 70 and 75% based on the appraisal of the land and the cost of the construction. Doing some math and it just seems like there's no way we can do this.

prefab: 2000 sqft (excluding 400 sqft garage)

cost to construct: ~450k (this is just an estimate but the comps in the neighborhood for this size home is ~950k)

remaining balance on 1st mortgage loan: 412k

lender LTV: 75% * (450k + 412k) = 646,500 (we're aware this could be much less depending on the appraisal of the land)

The loan that's been mentioned quite a bit is the construction-to-perm loan.

Lender pays off the 1st loan of 412k which leaves $234,500 for the construction.

The remaining balance that we would have to come up with is: 450k - 234,500 = $215,500 to complete construction (excluding closing costs and what not)

We don't have that amount of cash and we could do it if we saved 4k every month until 2016. (doable but we can't wait that long)

So, we may have to back out of the contingency and rethink our strategy but we really would like to build a prefab.

We've checked out the FHA loans but you have to live in the property (and we just can't because it's a 1 bed/bath and it's a teardown) and a new home can be built so long as part of the existing foundation remains which is not an option for us.

There has to be another way to make this possible but I'm just not sure what that option is. Thoughts?

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Comments (5)

mydreamhome
16 years ago
I don't know if this would work for you, but I've seen it suggested on other threads. In many parts of the country, a 2000sq ft stick built home through a builder would run somewhere between $100-135 sq ft nicely finished (prefabs less than that). Many of these contractors need work & may be willing to travel. This could save you $$$ on labor even if you paid for their expenses as well. Materials would have to be bought locally so no real savings there. Just a thought : )
trinidiva
16 years ago
Hello We are currently constructing a new home with a custom builder and took out a construction to perm loan.We worked with a local mortgage company that the builder suggested. Was able to do a LTV 90%, had to come up with approx 10% down, prior to the construction
Have you tried a samll local bank in your area, they seem more flexible than the big mortgage companies like BOA
Hoe this helps
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coloradomomof5
16 years ago
Are you qualified for a VA loan? We are using ours this time around. My husband and I are both veterans, so using a VA doesn't require as much down.
lyfia
16 years ago
Something with your math doesn't look correct. You wouldn't take the 75% off the amount you are loaning for a LTV. The value would be the lot and the house when it is finished. So say if houses in the neighborhood of similar size/lot is selling for 950K then that would be the value that you would take 75% off of.

So 950K * 75% = 712,500

Then your loan is 862K so you would need to come up with 149,500.

Of course it all depends on what the true value of the property would be when it is done.
jaychan
Original Author
16 years ago
So we've removed the contingency and close escrow this week. No banks will offer a construction loan on prefabs since the developer will need about a 50% dispersement to purchase materials to build the prefab... and that isn't securitized so banks just won't do it. Instead, we plan on using the FHA 203k loan. We're working with a HUD consultant and we should start construction in early 2012.