Real Estate Development & New Home Construction

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How do construction loans work??

Posted Jun 3 2022, 15:23

Hello all, 

I've been reading on construction loans but I believe I'm missing the "obvious". To make it easy, let's say I'm looking to buy a 800k home, and expecting to add about 200k worth of work. Can someone help me understand how a construction loan would work in this situation? Would my total loan be for $1million? 

Also, how does the bank cap you off? Do they take a percentage of what YOU think the ARV would be?

Los Angeles County, California

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Issac San Miguel
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Issac San Miguel
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Replied Jun 3 2022, 17:24
Quote from @Sarkis Gezalyan:

Hello all, 

I've been reading on construction loans but I believe I'm missing the "obvious". To make it easy, let's say I'm looking to buy a 800k home, and expecting to add about 200k worth of work. Can someone help me understand how a construction loan would work in this situation? Would my total loan be for $1million? 

Also, how does the bank cap you off? Do they take a percentage of what YOU think the ARV would be?


 most construction loans are capped at 75% loan to arv. 

you are also capped by loan to cost, for new investors this can be as tight at 80% loan to cost. more experienced investors can get 90% loan to cost. 

when you finance with a rehab or construction component, the “holdback” is available for you to draw from. the amount drawn is based on your budget at the time the loan closes. 

draws work as a way to keep you liquid. 

the amount of your loan increases as you draw against the hold back. 

there is a lot to unpack, but that is the jist. feel free to reach out if you have any questions.

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Frank Greg
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Frank Greg
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Replied Jun 3 2022, 18:31
Quote from @Sarkis Gezalyan:

Hello all, 

I've been reading on construction loans but I believe I'm missing the "obvious". To make it easy, let's say I'm looking to buy a 800k home, and expecting to add about 200k worth of work. Can someone help me understand how a construction loan would work in this situation? Would my total loan be for $1million? 

Also, how does the bank cap you off? Do they take a percentage of what YOU think the ARV would be?


@Sarkis Gezalyan  Technically what you described would be a standard rehab (fix flip) loan. You are buying a property for $800K that requires an additional $200K in repairs. A construction loan typically involves acquiring raw land for development which is a different can of worms and both loan types could vary in requirements and how it is structured.

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Kevin Woodard
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Kevin Woodard
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Replied Jun 3 2022, 18:43

@Sarkis Gezalyan Lots of good info posted. Different lenders will lend on different caps. Some to total loan cost, which can include various costs. How they vet you as the borrower will vary. But generally if you can get your loan under 70-75% loan to the ARV you'll walk away will most, if not all your initial capital, when it's time to refinance.