{"id":50727,"date":"2013-11-19T05:33:28","date_gmt":"2013-11-19T12:33:28","guid":{"rendered":"https:\/\/www.biggerpockets.com\/renewsblog\/?p=50727"},"modified":"2024-02-23T15:32:39","modified_gmt":"2024-02-23T22:32:39","slug":"2013-11-19-construction-loans","status":"publish","type":"post","link":"https:\/\/www.biggerpockets.com\/blog\/2013-11-19-construction-loans","title":{"rendered":"How to Use Construction Loans to Get 100% Financing on Your Next Deal"},"content":{"rendered":"

Every week someone approaches me that is dying to grow their real estate business. \u00a0However, they have used all of their cash in property improvements and down-payments.<\/p>\n

With little cash, they seem helpless. \u00a0However, 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.<\/em><\/p>\n

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

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.<\/p>\n

For simplicity sake, I’m just going to cover how a construction loan would work if you were building the house for yourself.<\/p>\n

A Step by Step Guide to Obtaining a Construction Loan<\/h2>\n

Before you even approach a bank, please have a deal that you are about to do.<\/p>\n

What you need to have before you even approach a bank is:<\/p>\n

    \n
  1. Contract for lot<\/li>\n
  2. Blueprints<\/li>\n
  3. Construction cost estimates<\/li>\n
  4. Qualifications of the GC (General Contractor)<\/li>\n<\/ol>\n

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

    It is best to have already calculated your mortgage payment<\/a> on the costs and to show how easy it will be for you to pay this.<\/p>\n

    A big sticking point with banks is lending 80% to cost or 80% to appraised value. \u00a0Obviously the latter is preferable. \u00a0These banks aren’t impossible to find, but you will probably need to do some legwork to find them.<\/p>\n

    You pay interest only on the outstanding amount though-out the construction period.<\/p>\n

    After each draw, someone will go out and physically inspect the work has been done. \u00a0There is usually a nominal fee for this.<\/p>\n

    \"How_Does_A_Construction_Loan_Work\"<\/a><\/p>\n

    The closing of the construction loan<\/a> is obviously important. \u00a0Construction 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.<\/p>\n

    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).<\/p>\n

    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.<\/p>\n

    Photo Credit: photosteve101<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

    Every week someone approaches me that is dying to grow their real estate business. \u00a0However, they have used all of their cash in property improvements and down-payments. With little cash, […]<\/p>\n","protected":false},"author":1277,"featured_media":50761,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[7406],"tags":[],"class_list":["post-50727","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-creative-financing"],"acf":[],"comment_count":0,"_links":{"self":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/50727","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/users\/1277"}],"replies":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/comments?post=50727"}],"version-history":[{"count":0,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/50727\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media\/50761"}],"wp:attachment":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media?parent=50727"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/categories?post=50727"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/tags?post=50727"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}