For a single family bank construction loan provided by a bank or institutional lender, there are lots of very particular rules you need to comply with before you’re going be able to fully take advantage of this low cost source of construction financing.
Remember that for single family builds, banks provide financing if you’re buying from a residential builder, contractor, or performing a self build.
For conventional or non insured scenarios where you’re putting down at least 20% of the cost of the project, remember that your investment must come from your own resources with the actual source of the equity you’re putting in being disclosed to the lender at the time of application. Another key with a conventional construction loan is that the bank or institutional lender will not put any funds into the project until the borrower’s equity portion is fully invested and verified. In addition, while the lender will consider a certain portion of the equity as sweat equity, the cash amount typically needs to be at least 50% of the required down payment.
In higher ratio scenarios where mortgage insurance is required, the borrower must once again verify at the time of application the amount and source of their equity investment that will go into the project. Because the financing amount can be greater than 90%, the borrower has to also be able to show that they can cover off a closing cost allowance of at least 1.5% of the cost of construction or appraised value of the property, which ever is lower. The same rules apply for equity being invested up front before the bank will advance any funds towards the project.
These rules will vary somewhat from bank to bank, but for the most part, they all touch on each of these particular requirements in some way, shape or form. And each institutional construction mortgage lender will be very particular as to the application of these rules and requirements, so much so that there are cases where funds never get advanced due to the borrowers in ability to completely comply with all the specific requirements of the mortgage.
The best way to get the most out of a bank or institutional construction loan is to work with an experienced construction mortgage broker who has successfully guided other home builders through the process.
If you require a bank construction loan or want to know more about your options and the process, please give me a call so we can go through everything together.