Hard money to New Construction

9 Replies


My question - can I refi a hard money loan into a new construction loan if my conventional lending doesn't come through.  tear down purchase price 295k 105 down.

I have a contract on a home. I am using conventional financing but I do not have a financing contingency in the purchase contract (everyone else is paying over asking with cash). I have a 5 day option period and It doesn't look like I can get the appraisal done for a week.

My lender isn't worried about the appraisal being off but she may not be able to give a loan on the property if it is inhabitable. 

I plan to refi into a new construction loan and build two units on one lot. I plan on living in one and renting/selling the other. 

I would love to hear from @J Scott and @Jon Klaus

Thanks in advance!

A little bit confused...

Why are you getting a conventional loan if you plan to refi into a construction loan?  Why not get the construction loan to begin with?

What you're likely to find is that getting a conventional loan on a house that isn't move-in-ready is going to be difficult.  Even something as simple as the hot water heater not working, a missing stove or a broken window can keep the loan from getting through underwriting.

As for your specific question about refi into a construction loan from hard money, the most likely answer is -- yes, you can refi, but there is likely to be a seasoning period of 6 months (after purchase) before a typical lender will allow you to refi.  Again, better to just purchase with the construction loan if that's at all possible (though I realize that can be difficult if you don't have all your permits and plans in place by the time closing comes around).

@Jason Carter   Ok you've lost me, are you saying you're going to buy a property using a hard money loan, and then want to obtain a construction loan, that will pay off that loan and give you enough for construction? 

If that's the question, the answer is, yes it can be done. The other question is, will there be enough profit in the deal to pay all the points, fees, appraisal, etc. on two loans and build the house? Why not get a HML for purchase/construction, build the house, and sell it? Why two loans?

Thanks so much for the quick reply @J Scott! I was looking at all kinds of property and wasn't really prepared for new construction (seems to be the best use for this one). If I paid cash for the house/lot I would just use a new construction loan but I am having to finance the purchase as well. I don't have any site specific plans or permits pulled (just got into contract yesterday). The New Construction Diary has been a great read.

Thanks for all of your contributions to the BP community  

Hi @Karen Margrave,

I plan on living in one unit and renting/selling the other. I don't think I could profit enough to pay off a hard money loan by selling just one. So I would need to carry a mortgage. This is an area I have wanted to live in for a while and this is the most affordable dirt I could find. It would be much easier if I didn't plan on living it it. I may have to flip it.

Thanks Karen!

If I was able to find some private money, how would I go about keeping the house and paying off the private money? Would a new construction lender pay off a private money loan? I'm pretty sure I could wrangle up the rest of the money but i am not sure how to pay the private money back. 

For a construction loan you'll likely be required to put 35% down (or have 35% equity after 6 months) -- you may find that paying cash for the property (if you have that ability) is the best way to go, since you'll need a reasonable amount of equity anyway...

But, worst case, you shouldn't have any issue refinancing from HML to a construction loan assuming you season the purchase (likely 6 months) and can qualify otherwise.

@Jason Carter  I do a lot of construction lending, as its complicated and most lenders don't want to mess with it :-)

The simplest way to do this is to get the land free and clear.  Then when you get a construction loan you simply pledge that for your equity requirement.

The right lender will lend 90% to cost; 80% to appraised value.

One small thing to remember is to get homeowners insurance before you move in, as your builders risk policy will cancel out if you move anything in during construction.

Additionally, don't forget file a notice of completion at the local courthouse. 

Does the lender you talked to know that you want to do new construction? Hopefully it is a scorching deal because the element of time is going to make your soft costs go through the roof if you're using hard money and you have seasoning requirements. 

Something you may want to look into is buying time to increase your financing options. Could you put a couple thousand down to extend out an option period for several months? In that scenario you could go out and find a partner or a private money, anything so that you do not to have to do it with hard money. If you could get the place free and clear then a construction loan would be a lot easier to obtain since they will have to be in first position.

Thank You Jimmy and Thank You Neal.

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