Loan Question - Help!

6 Replies

Good Morning Everyone,

I have just finished purchasing land (8400 sq ft) in El Paso, TX and would like to essentially build a duplex/house for rent. I have been working with a local bank and they have advised me that they will supply 75% of the value of the project. That means that I will have to again save enough money to put down the other 25%. Is this my only option?!? I really just want to get a loan to get started on the whole project ASAP. 

If you all could please leave some tips or feedback, I would definitely appreciate it!

Thank you,

Abraham M.

@Abe Macias  The bank is likely doing a “table top” appraisal by looking at your build plans, estimating costs, and then estimating the value of the property after construction is completed. For example, very basic, say your land value is $10k, and the cost of the build is $150k, the table top appraised “improved” value is $160k. The bank will give you a construction to permanent loan of $120k which is 75% Loan to Value. In this case you need a $30k down payment (the difference between construction cost $150k and bank loan of $120k). You could shop around banks or ask a mortgage broker to help you find a low down-payment construction to perm loan. If you intend to live in one side of the duplex that may change the dynamics to your favor. Going into a bank and presenting this as an owner-occupied deal versus investor deal could make the difference. Another solution, depending on the land location and zoning, is a modular/manufactured duplex. Lookup Oak Creek Homes in Texas. Your cost may be much lower and the manufacturer may offer financing options. Good luck!

@Abe Macias 75% LTV seems to be the going rate with commercial lenders here in El Paso. Fortunately, you have a couple options to cover the rest. Like you said, you can save enough to cover the 25%. Another option is hard money. You can use that as a bridge loan until you can get the place settled and refinance with your lender once you get the property settled. Initially, it will cost you more in interest (hard money isn't cheap) but it can help bridge the gap to get the property going. We've used this approach with several properties and it has helped us develop some really good relationships with our primary commercial lender (local bank) and several hard money lenders that are eager to fund deals. If you have anymore questions shoot me a message.

There are a few lenders who can lend 100% of the construction cost if you own the land outright.  Keep in mind that you'll still need to front some money to start the project because they only reimburse based on progress.

Also with construction loans, you should only pay interest on the amount that you've borrowed so far, so the interest isn't charged on the entire loan amount.

Both @Tommy F. and @Nghi Le make excellent points about what options are available.  To summarize even further @Abe Macias , your original post said the bank in question will supply 75% value of the project.  The project should mean land + hard costs + (potentially) soft costs.  So you've already purchased the land, and though you alluded to the fact that you used a 25% down payment at purchase, you didn't quite specify if that was the case.  If you purchased All Cash, then a construction lender (commercial or hard money) should easily lend you 100% of the construction money if the purchase of the land equates to at least 25% of the project cost.  But if you only put down 25% to purchase the land, then yes, any construction lender (commercial or hard money) is going to want you in another 25% of whatever the cost is to build.  A developer such as yourself should be into a deal at least 25% of THE TOTAL PROJECT COST one way or another, even if your final value will be gargantuan compared to what you paid for the land or what you can build the project for. It's a reasonable request, otherwise the loan you seek (more than) 75% total project cost could be considered a joint venture scenario.  Hard Money lenders may give you a high amount of leverage for the purchase price + construction money on a REHAB project, but full construction projects demand a significant amount of skin in the game from the borrower all around.

If you are looking for 100% financing, and your DTI can take it, what about taking out a personal loan (also called signature loan or unsecured loan) for the down payment? Let that sit in the bank for at least 2 bank statement terms. Obviously, the lender will want to know that you can cover both the new loan and the personal loan payment, so that's why it's immportant that you watch your DTI numbers. But if all looks good, that is how you could do it if you don't have the cash on hand.

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