How do you get financing to build a spec house?

Question

I am looking to build a spec house.  Bank have told me I need 2 previous successful builds to qualify for financing which I don't have as this would be my first time.

I don't want to use hard money lenders as I have heard horror stories of them not releasing funds on time.

my plan is to try and get a home equity loan for most of my financing.  I was planning to finish my basement as this would nearly double my homes sf, then reappraise in order to get as much home equity as possible.

do you think this is a good idea? Any other ways to get financing?

thanks

Syed Ahmed · Answer

Love the ambition. Getting into your first spec build is no small step. You are right that many banks want a proven track record before offering construction loans, but leveraging your home equity to get started is one of the smarter and lower cost paths if you have the capacity. Just make sure your basement project is done with permits and quality finishes so the appraised value reflects the upgrade. You might also explore partnering with a licensed GC who has past build experience since some lenders will approve based on their track record instead. Feel free to connect if you ever want to talk through other financing angles. I am in the lending space and happy to share ideas.

Ryan Arth · Answer

@Bob Ross As others have said, partnering with GC is a good route.

Regarding your mentioned plan, why not keep that basement finishing cash towards the build? If you invest it into your basement and the appraisal doesn't come back as you wish, or the HELOC doesn't get approved, etc, you are jammed up. And that would be interest bearing debt, whereas the cash you have is currently available.

Instead of thinking of hard money lenders in the traditional sense, why not think of those in your network as potential lenders/investors. They can invest cash or retirement funds into your venture. The same diligence the bank would want to see completed can be used to show potential investors.

Jeffrey Blais · Answer

@Bob Ross, Let's connect!  We may have some ideas for you regarding your current scenario.

Jeff Sine · Answer

Hey Bob — great question. A lot of first-time builders hit that same roadblock with traditional banks wanting a track record.

I’ve seen a few options work in similar situations:

• Tapping into equity (like you mentioned)
• Bridge or asset-based loans that focus on the project itself
• Partnering with a GC who’s done similar builds

Also — if your plan ever includes holding the property as a rental, even short-term, there’s a financing option called a DSCR loan that’s based on the rental income, not your personal income. It’s worth keeping in your back pocket depending on your exit strategy.

Happy to chat through any of these if you want a second opinion.

Jeff Sine · Answer

Bob, great question. Asset-based loans are usually offered by non-bank or specialty lenders rather than traditional retail banks. These can include programs where approval is based on assets you hold (like investment accounts, retirement funds, or cash reserves) rather than just W-2 income.

At CrossCountry Mortgage we actually have access to these types of non-QM solutions, including bank statement loans, asset depletion programs, and investor-focused products, that can work when traditional banks say no.

If you’d like, I can walk you through what these look like compared to conventional loans so you can see if it’s a fit

Bob Ross · Answer

@Jeff Sine   What kind of banks offer asset based loans?

Mike Klarman · Answer

There's no doubt there are Hard Money horror stories, I have a few myself.  But as a whole, if you know how and when to use hard money AND you make a nice relationship with a lender AND they hand you a quality loan officer then it is very useful.

I know lenders that if you can show like 40% of the total budget, they will work around the borrower being a 0.

These deals are very capital intensive.  At the close you get nothing, unless you are refinancing seasoned land as part of the deal then you may take something home, but in most cases you close with nothing but the pen you signed with in hand.

So now the project needs to start and not only start but get going strong and that may take 30k - 50k capital infusion that is needed and won't be recouped until the project's end.  Then once you burn through your deposit you start taking draws but you wanna get so deep into your project with your deposit that it will unlock most of the budget which will allow you to finish.

Problem is, whether it is a fix n flip or ground up, ppl try to piece mail it together.  Do a little, take a draw, exhaust that small draw, take another draw, exhaust that in days and need another.  That will stunt any budget or timeline doing it that way.

But if you get can a lender to give you 85% LTC let's say, based off of you showing you can cover 40% of the project if need be, and your credit is good, and then you also had the like 30k - 50k for that first infusion and then all the numbers you were working with at the start are right and true, then maybe it can be worth it.

Bob Ross · Answer

@Mike Klarman think could your 40% be home equity or an approved home equity loan sitting untouched?

Bryant Brislin · Answer

Maybe joint venture with a general contractor who has a track record that can be shown to the bank.

How do you get financing to build a spec house?

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