Starting construction with our own money won’t be a problem.
April 15, 2010 by tjadmin
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.
Question: RE: Construction-to-Permanent Financing. . . .
If wanting to build a 275K house, single-family, and we own the land free-and-clear, will the value of the land typically be applied toward any down payment, thereby lowering our up-front monetary input? How does that work with loan packaging by banks? Thank you.
Andrew,
Equity in the land does count as your down payment or cash in the deal. We’re back to where we were 10+ years ago in construction lending, lending off the lesser of costs or the appraised value of what the house would be worth in today’s market if finished already as planned. If your free and clear lot was worth $100,000, for example, and construction costs are $400,000, you’re at an acceptable 80% loan-to-cost, and would not have to bring additional money into the deal if the property appraised for at least $500,000. Soft costs like plans, plan check, engineering, geo testing, etc., if documented with cancelled checks and invoices, also count as cash in the deal.