Mortgages & Creative Financing

How to Use Construction Loans to Get 100% Financing on Your Next Deal

Expertise:
27 Articles Written
100% Financing

Every week someone approaches me that is dying to grow their real estate business.  However, they have used all of their cash in property improvements and down-payments.

Want more articles like this?

Create an account today to get BiggerPocket's best blog articles delivered to your inbox

Sign up for free

With little cash, they seem helpless.  However, they are still wanting to continue to grow. There are a million strategies gurus try to sell, however, I’m here to tell you the hard-truth: they rarely work and get-r-done.

There are two primary way’s to get 100% financing and I’m going to focus on the most popular one: construction loans.

It's funny, there are a ton of flippers on BiggerPockets and a ton of people like me who buy distressed properties, fix them-up and then rent them out. Most people don't know exactly how a construction loan works, even though they are very popular types of loans.

For simplicity sake, I'm just going to cover how a construction loan would work if you were building the house for yourself.

A Step by Step Guide to Obtaining a Construction Loan

Before you even approach a bank, please have a deal that you are about to do.

What you need to have before you even approach a bank is:

  1. Contract for lot
  2. Blueprints
  3. Construction cost estimates
  4. Qualifications of the GC (General Contractor)

Once you have all of the available information, have your personal (and/or business) tax returns and all other appropriate financial statements they request.

It is best to have already calculated your mortgage payment on the costs and to show how easy it will be for you to pay this.

A big sticking point with banks is lending 80% to cost or 80% to appraised value.  Obviously the latter is preferable.  These banks aren’t impossible to find, but you will probably need to do some legwork to find them.

You pay interest only on the outstanding amount though-out the construction period.

After each draw, someone will go out and physically inspect the work has been done.  There is usually a nominal fee for this.

How_Does_A_Construction_Loan_Work

The closing of the construction loan is obviously important. Construction loans generally have a 1-year maturity with the understanding that after 1 year, the loan will be closed due to you selling the property (speculative construction) or you closed the loan and the loan is now a mortgage in the secondary market.

If you utilize a construction loan for speculative construction and didn't sell the house within the one-year maturity, you will probably have to take out a new loan under investor terms (20-year amortization, etc).

There are a lot of details I’m sure I left off and as always, every lending institution is different, so be sure to do you due diligence. If you have anything to add I would love to hear about it in the comments.

Photo Credit: photosteve101

    Ian Kuchman
    Replied about 6 years ago
    Jimmy – Quick question… If this is an option for 100% financing, would you only be able to achieve that if the bank agrees to a loan equal to 80% appraised value, which would be greater than 100% of price-tag? Very useful article, thanks!
    Jimmy
    Replied about 6 years ago
    Ian Thanks for the kind words! I’m not exactly sure I understand your question. But to be clear, some banks do allow 80% loans based on appraised value (read: not cost).
    Ian Kuchman
    Replied about 6 years ago
    “There are two primary way’s to get 100% financing and I’m going to focus on the most popular one: construction loans.” how is that achievable when the banks have a sticking point of 80% of cost or appraisal?
    MJ
    Replied about 6 years ago
    I have the same question. I am not seeing the 100% financing.
    Jimmy
    Replied about 6 years ago
    Ian and MJ – if you get a 80% loan to appraised value – the trust cash-required for your 80% LTV can be managed to $0
    Dawn V.
    Replied about 6 years ago
    I’m a bit confused with this as well. So are you saying you need to find a bank that will lend 80% of the ARV, and if that number is greater than the total purchase price plus rehab cost number, then you will have in essence a 100% loan? What do you mean when you say, “if you get a 80% loan to appraised value – the trust cash-required for your 80% LTV can be managed to $0?” Are you equating appraised value to more of an ARV appraisal? And what is “trust cash”?
    MJ
    Replied about 6 years ago
    I have the same question. I am not seeing the 100% financing.
    Mark Ferguson
    Replied about 6 years ago
    Great article Jimmy! Someone had commented on one of my articles that they are building in North Dakota and renting out just like you described. I’d never even thought about this possibility.
    Jimmy
    Replied about 6 years ago
    Thanks for the kind words Mark! This might be an option for you to accelerate to your “100 rentals” goal!
    Terry P
    Replied about 6 years ago
    Don’t mean to throw a monkey wrench into your blog but I can tell you as a builder getting a construction loan is a small part of making a profit. It’s just not that simple! Reply Report comment
    Terry P
    Replied about 6 years ago
    Don’t mean to throw a monkey wrench into your blog but I can tell you as a builder getting a construction loan is a small part of making a profit. It’s just not that simple!
    Jimmy
    Replied about 6 years ago
    Terry – agree that nothing is that simple – I only talk about the loan process because that is where my expertise is.
    Steve Johnson
    Replied about 6 years ago
    Just visited a lender today that doesn’t do 203ks because of how lengthy they are. Instead, they will provide a construction loan. What are the advantages and disadvantages of 203k versus construction. I’d been focusing on securing a MF with FHA with the intention of owner occupant. 203k would help with repairs and updates but from what I understand FHA doesn’t allow you to refinance until a year after your initial purchase whereas the construction loan would? Maybe? Its a new thing I’m highly confused about. The lender, not having worked with many investors, had trouble explaining it as well.
    Steve Johnson
    Replied about 6 years ago
    Just visited a lender today that doesn’t do 203ks because of how lengthy they are. Instead, they will provide a construction loan. What are the advantages and disadvantages of 203k versus construction. I’d been focusing on securing a MF with FHA with the intention of owner occupant. 203k would help with repairs and updates but from what I understand FHA doesn’t allow you to refinance until a year after your initial purchase whereas the construction loan would? Maybe? Its a new thing I’m highly confused about. The lender, not having worked with many investors, had trouble explaining it as well.
    Jimmy
    Replied about 6 years ago
    Steve Great question! I’m going to be completely honest and 203K loans are not my expertise because they are secondary mortgage products. I underwrite loans that are kept in-house. I would strongly suggest you talk to a community banker that can be flexible with your situation. Call a couple of small community banks and ask to speak with the commercial loan officer. Reply Report comment
    Jimmy
    Replied about 6 years ago
    Steve Great question! I’m going to be completely honest and 203K loans are not my expertise because they are secondary mortgage products. I underwrite loans that are kept in-house. I would strongly suggest you talk to a community banker that can be flexible with your situation. Call a couple of small community banks and ask to speak with the commercial loan officer.
    Tim
    Replied about 6 years ago
    “…have your personal (and/or business) tax returns and all other appropriate financial statements they request.” That also means coming up with a perfect or close to perfect FICO and a personal guarantee. Good luck if you’re a seasoned investor that has taken a few hits. Full-doc is a no-brainer guys. Anyone who wouldn’t have already taken advantage of the bank knowing this is either novice or a fool. Now, find us a bank that will lend based on equity and no-doc and then we’ll have something of value to talk about!
    Jimmy
    Replied about 6 years ago
    Tim You should talk to a community bank about an investor loan – NOT a loan in the secondary mortgage market which is what you are referencing.
    Tim
    Replied about 6 years ago
    Never heard of an “investor loan”. Is that a non-recourse, no-doc, equity-based loan? I don’t know any banks that will do those any more. Maybe if we had a few million on deposit, they would consider.
    Kevin
    Replied about 6 years ago
    Jimmy, I understand it depends on many factors, but how does the interest rate on construction loans compare to other types of common loans?
    Susan Cain
    Replied about 6 years ago
    For short-term, interest-only loans, your best bet is Private Money. The seasoned investor can put up his existing real estate as collateral. The lender only looks at the deal and your ability to make the monthly payments.
    Eduard Gubarik
    Replied about 4 years ago
    I specialize in zero down construction loans and 80% financing on Land Loans. I can finance up to 100% of your Construction Costs as long as you have 20% future equity in the project or equity in the land. For example, if your project costs are $360,000 but your project is appraised for $432,000, you do not need to bring any money down to the table because we use the equity in future value as your down payment. People are always amazed at our programs! No origination or fees, one time close loan, nationwide lender. Feel free to call me anytime to discuss. Eduard Gubarik(916) 223-4257?Land & Construction Loan Guy”