Construction Loan Rates

In general, your construction loan rate will either be the first year of an intermediate ARM like a 2/1, 3/1 or 5/1 ARM, or it will be a prime based rate unrelated to the permanent financing rate.  It you get a 2/1 ARM, for example, the initial rate is fixed 2 years, and then would adjust annually the next 28 years.  The construction period would be 12 months, during which time the loan is interest only on the amount that has been disbursed (not the entire loan amount).  In the case of a 2/1 ARM (adjustable rate mortgage), after 12 months the house would be done (assuming all goes as planned) and the loan will be fixed one more year at the inital rate, and the loan will begin 29 year amortization from that point.  This would be the situation if you got a single close construction loan.

If your loan is only an interim construction loan (not the permanent financing), or if the rate during construction is based on prime plus some margin with a promise of a note modification (without additional documentation) when the house is done, your construction loan rate will not be the same as your permanent loan rate.

California Lot Loan

We can do a lot loan in California for up to 70% of the purchase price of a vacant lot.  The lot should be less than 10 acres, although slightly larger parcels may be acceptable if in a subdivision of similar parcels, and vacant lots of similar size have sold recently in the area.  No structures are allowed on the parcel, even if having virtually no value, or having no value attributed to them.  This would include partially burnt, partially collapsed or partially torn down structures.  These would create both liability and marketability issues (in the case of default) for the lot loan lender.  If the vacant lot has a foundation, this is probably acceptable, particularly if no work was done recently, and it is a slab foundation.  Retaining walls may be allowed as well, depending on the situation.

Refinancing a vacant lot in California is also possible.  We can do 65% to 70% of the current appraised value on a California lot loan refinance.  These are particularly useful if the borrower is not ready to build, but faces a balloon payment on their current lot loan, such as on the many Indymac lot loans that were done.  Lot loans in California are fixed 3 years, and then adjust annually the next 27 years,  so they never have a balloon payment due.

Can we start construction, and then get a construction loan later?

This is a bad idea for many reasons, but sometimes borrowers must start due to the permit process.  If this is the case, and you have to start grading, and maybe have to do the foundation, we would suggest a separate contract with the builder.  Contact a local office of First American, Fidelity or another big title company.  Tell them what you are doing.  Put grading, foundation, retaining walls, and utilities on a separate contract.  Obtain lien releases as instructed by the title company you’re going to use.  Finish work, pay everyone, and get lien releases signed.  File a notice of cessation of work, and expect to wait 30 to 60 days (check with title company) before getting a construction loan to build the house.  The best approach would be don’t go verticle if possible.

Certainly, it is better not to prestart at all.  Don’t even put up a fence or allow a porto-potty to be delivered. You create problems with potential mechanics liens and obtaining title insurance for the construction loan.  You will have even disqualified yourself from dealing with most construction lenders.  Some unwise borrowers have even begun construction, used up most of their reserves, charged up credit cards, and made themselves un-approvable because of credit scores and requirements for liquid reserves after close of escrow.

Lot Loan Refinance

We can do a refinance of a vacant lot on Lot Loan Program #1.  There can be no cashout, so we can only refinance your current balance plus closing costs.  This also means no money for plans, permits or construction on a lot loan refinance, even if you are not walking away with cash.  A cashout refinance of a vacant lot is defined as paying off anything other than your current lien or liens on this lot and closing costs.  If you used an equity line on another property to pay for the lot, or a loan from a relative, you cannot refinance that loan on Lot Loan Program #1.  We may be able to arrange a private money cashout lot loan at higher rates and only to about 40% of value.

We can do a lot loan refinance of your current lot loan up to 65% or 70% of the current appraised value, depending on the loan amount.  Land prices are even more volatile than home prices, so your lot may be worth considerably less than when you bought it.  Appraisals can be difficult because of bank owned parcels selling well below previous sale prices, lack of sales altogether, and a lack a vacant lots in mature urban areas.  Nonetheless, if you are facing a balloon payment such as on an old Indymac lot loan, don’t wait until the last minute.  If your balloon note is due, lenders usually stop accepting payments and start reporting lates.