Starting construction with our own money won’t be a problem.

April 15, 2010 by · Leave a Comment 

This is not a good idea.  Historically, most construction lenders won’t touch a deal that has pre-started.  Possible mechanics liens create title insurance problems.  Best case, and at a minimum, the title company and lender would want construction to stop for the mechanics lien window of 60 days, after filing certain notices.  The title company would probably want to underwrite the borrower’s income and assets before issuing title insurance, and they’ll want indemnification agreements signed to cover themselves if there is loss of lien priority.  Even if a title company can be found to issue title insurance at the time the construction loan is funded, most banks won’t do this scenario. 

More so than in new construction, pre-starts happen in a rehab/addition situations, where the project cost are more than expected, and the borrowers begin seeking a construction loan when their funds are exhausted.  They then may not have the liquid reserve requirements after close of escrow to meet program guidelines.  We can now do these pre-starts on Construction Loan Program #4 if all funds are documented, requirements for liquid reserves after close of escrow can still be met, work has stopped long enough so mechanics liens are not a problem, and title insurance can be obtained.  Still, not a good idea to pre-start.

Construction lenders will lend off of what the house will be worth when completed.

April 14, 2010 by · Leave a Comment 

Between 2003 and 2008 this was true for many construction lenders.  Construction lending had moved to where, if a bank was going to be competitive, they needed to ignore how much cash the borrower had in the deal, and just lend of the end value.  Multiple construction lenders were doing 100% of costs as long as the appraised value as completed gave them the loan-to-value ratio for which they were looking.  This was even done on stated income loans.  Since mid-2008, we’re back to where we were a decade ago such that construction  lending is now done based on the lesser of two numbers.  One number is total costs (lot price or value, plus prepaid soft costs, plus construction hard costs) and the other an appraised value as to what the house would be worth in today’s market if completed already as planned.

My land has to be paid off to get a construction loan.

April 14, 2010 by · Leave a Comment 

Your vacant lot does not have to be free and clear.  The current value of the lot is added to construction costs and prepaid soft costs.  Total costs are then compared to what the house would be worth if completed already as planned, as demonstrated by an appraisal.  Construction lending is back to the more conservative approach of 10 plus years ago wherein construction lenders lend off of the lesser of these two numbers, total costs or appraised value.  If loan-to-value and loan-to-cost numbers are in line with current bank requirements, the new construction loan can pay off the lot loan on the property.  In this way, equity in the lot comes into consideration, but the lot does not have to be free and clear.