Building a home, land as equity and down payment?

8 years ago

We are getting ready to build a home and so far had a heck of a time with the financing process... I’ll try to keep it brief.

We purchased a lot for $55,000 (cash), and started the loan application process for a one-time close construction loan.

As this was getting started, we decided that we wanted to purchase the adjoining lot (for $57,000).

We asked the bank whether we should finance it with construction or pay cash - they told us if we could pay cash for the lot then that would be awesome and they would use what we paid for the lots toward our down payment ($112,000 total now paid cash for two lots) and we’d have to only bring about another $30k-ish to the table.

The loan is for $700,000 and they are now saying we need to bring another $85,000 to closing ($112,000 lots + $85,000= $192,000 cash now out of pocket).

What am I missing here or not following, this loan thing so far has been a mess. I’m not even sure I understand how much we can tap to build the house now... yikes!

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Comments (4)

Denita
8 years ago
last modified: 8 years ago
Have your LO go over the figures with you. Sounds like you are going for a construction-permanent loan (one time close) and the LTV is the issue. The LTV maximum has nothing to do with you individually, it is a function of one of the guidelines for the c/p loan. What is the max allowable LTV for this type of loan with this lender? Has there been an appraisal yet? Where did the values come in for the appraisal relative to the costs?

I have found the best construction-perm loans with small regional lenders (usually only in one or two counties). Sometimes an independent bank. Not the big box banks at all.

Because you used the phrase "been a mess" I suspect the lender OR the LO doesn't do a lot of these const perm loans.
greg_2015
8 years ago
All that matters is what the home+land appraises for after it's built. The banks will loan you a percentage of that amount because in the end that is what they have as collateral on the loan.

It doesn't matter what you paid for the lots. You can't sell the lots after the house is built. It is all one piece now and is appraised at a single value, not the sum of it's parts.

It doesn't matter how much it costs to build the house (only what it's worth after it's built).

I'm guessing the appraisal (home+land together) came in around $875,000? Eighty percent of that value is what they'll lend you ($700,000).

I'm guessing the cost to build is $785,000? That means you have to come up with the $85,000.
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greg_2015
8 years ago
last modified: 8 years ago
If you are still wondering "where is the money that I spent on the land factored in?" then lets pretend you didn't own the land already.

Total cost to build is the construction cost plus the land cost. So the total cost is $785,000 + $112,000 = $897,000

Appraisal after the fact is still $875,000 so the bank will loan you $700,000.

You need to come up with the difference between $700k and $897k which is $197k.

The basic concept to grasp is that the cost to build is not necessarily equal to the value after it's built. Someone could design a really stupidly designed house that cost 2 million dollars to build, but the resale value after it's done is only $500k because nobody else would want the house. The bank isn't going to lend you anywhere near the 2 million to build that house because that would be a horrible investment.

You'd like to think that the cost to build and the value after is similar, but a lot of variables play into it.

One factor that is playing against you is that you took two buildable lots and made them into one. That lowered the value right there.
Laurie Schrader
8 years ago
Your existing "bank" is really a commission hog. Get to a real mortgage broker, If you own any of this, much better ways to go.