Down Payment is before/after build?

4 years ago

Currently in the process of building a newly constructed home. We are currently paying off the land in hopes to start construction in early spring BUT also had thoughts about starting construction sooner since about 70% of the land is already paid off.

We can't seem to get a straight answer (I guess it depends on the bank we use) but is the settlement & down payment due before of after the build in completed?

Featured Answer

greg_2015

4 years ago

last modified: 4 years ago

Before.

How much of a down payment you need is dependent on a few factors.

Banks will typically lend about 80% of the appraised value of lot/house after the construction is done.

If you own the land outright, then the amount of cash that you have to come up with is the difference between the 80% appraisal value and the construction cost. That value could be nothing (if the land is extremely valuable) or it could be significant (if the construction cost is high and doesn't correspond with the value of the finished product).

To visualize the concept above, picture these two extremes.

(1) The land is extremely valuable and you want to build a shack on it. The bank will lend you the entire cost of building the shack because if you default on the loan, then they get the land and shack which is way more valuable than the loan that they gave you.

(2) The land value is insignificant and you want to build a hideous monstrosity of a house that nobody but you would ever want. The cost to build the house is astronomical because of all the unique quirks that you want and the value of the house at the end is negligible because anyone in their right mind will just tear it down and start over. The bank will only loan you a little amount (80% of the finished product) because most of the value is just the land and if you default then that's essentially all they get . You need to come up with the rest (ie. the bulk of the construction cost).

Most situations land in between those two extremes. Where you land depends on your specific situation.

A key concept to understand is that the appraised value is NOT the raw value of the land plus the cost to build the house. Hopefully it's close, but it isn't guaranteed.

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Comments (9)

chispa
4 years ago
Micah, I think it is important to state who owns the lot. I wouldn't want a builder to take out a loan to build on my property. If he has financial problems it would then tie up your property in the whole mess. If a builder carries a construction loan, it usually means they also own the lot or have some deal with the developer.
PRO
Jeffrey R. Grenz, General Contractor
4 years ago
You own the land so typically you're obtaining a construction loan or construction to perm loan for the process. Your lender will advise you on required down payments. Typically its 20-25% of the total project including the land.
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sheepla
4 years ago
You own the land...before. Equity goes in first.
Denita
4 years ago
^Very good description above. OP, please take the time to speak to a couple (several) of lenders that specialize in construction perm loans so you are familiar with their process. In any event, you will end up with a loan that has a lien on the land and the home even if your land is fully paid off prior to your construction. If you elect to start building prior to the pay off of your land, the lender will pay off the remaining balance due on the land. All of this is subject to the appraisal. And, as pointed out in the excellent post above in the last sentence the appraised value is not the cost of the land plus the cost to build the house.

The advantage of a construction perm loan is that you retain ownership of the land throughout the process and if there is a problem with your builder you can replace said builder with another one. Not easily, but it can be done. It puts you in a much safer place to have a construction perm loan.
MM
4 years ago
We’re planning on doing a construction perm loan and down payment and closing costs are upfront.
keith Dcil
4 years ago
Chandler,

Whether a down-payment on construction is due before the build, after the build or required at all will depend on your lenders requirements for your specific construction to perm loan terms & your builder/developer contract. There is no "industry" standard.
PRO
Virgil Carter Fine Art
4 years ago
Yep! You have to talk to your lender.
Susan L
4 years ago
We got a construction loan to build on property we bought previously with a loan from the same lender.

There was a closing for each part of the transaction with a down payment due at that closing. At the closing for the construction loan (which including rolling the land loan into the construction loan), the papers showed that our down payment had been applied first to the land loan.

There was a small amount still due on the land, so we started the construction loan with a loaned amount, even though the builder had not requested the first draw yet. And then the lender released the lien on the land with the county.

There won't be another closing when the build is complete.