How to get a HELOC for building a home myself

Question

Hey guys and girls. My brother in law and I plan to start investing by building new homes. I have a friend who used to be a home builder who can build me a 2000 as fr 4bd 2.5 bath home for 100k. I found a lot that I really like in my town that is 1.25 acres on top a hill with a view. Similar sized homes in that neighborhood are worth 380k+. So what I am thinking is buying the lot (listed for 39k but been on the market for a year) for 30k and having my friend build me the house for 100k. If this happens, we should have a lot of equity since it'll be ours outright, and then we will use the 380k of equity to build new properties since it's chesp to do. Anyway, my brother in law called his bank, and when they asked his intent for the money, they recommended a construction loan instead. He is trying to get a HELOC on a home he owns outright .We obviously don't want to go that route since we will be obligated to build with a contractor and it will cost us much more, to the point where it doesn't make sense. So my question is, how can we go about getting the HELOC for our purpose? This may sound like a dumb question, but we have never done this before.

Ola Dantis · Answer

@Luis Prieto Wait, what?!!! Your friend is building new construction for $50/sq ft. This is an awesome cost!

You need to introduce me to this friend. I need him!!!

Honestly, from what you are saying, I'd say forget that HELOC or REFI and start thinking of ways to get Private Money or raising funds from friends and family (you would be surprised who has money).

At these margins, you and your brother-in-law can make some serious bank!

Frank Geiger · Answer

It might be cheaper for your brother to REFI the home to pull the cash out. HELOCs are more expensive and can have variable interest rates over long durations.

Not doubting your friend but building a 2000 sqft home for 100k is pushing it. He would be doing the construction at cost and will likely keep coming to you for additional money to get the job done. Pricing for materials is not so cheap anymore. A consideration would be the finishes. If you want it to be worth 380k, you're going to need some nice finishes which cost more money.

Brandon Arce · Answer

@Luis Prieto , i don't know how you can build a house without a licensed contractor? You will need permits from your town, and in order to get those, the builder has to show them the corresponding licenses (electrical, plumbing etc) I started my project without the proper demolition permit, that cost me $2400 right off the back.!

John Verner · Answer

I currently am using a rental house that is owned outright for a HELOC to fund the interest on a construction loan with my brother. My brother owns a peice of land outright and he is putting it up as a collateral for a new construction loan. We are splitting the property into two lots. Here in MS it costs about $100/sqft to build a house. If we do a lot of the work ourselves with the help of licensed contractors, it will cost us about 50/sqft. It will cost us about $65000 to build. It will be worth about $95000 after conservatively. I do believe it can be done to borrow off of new construction. Make sure you are researching the value based on amenities provided and location of house. Sounds like a winner.

Kerry Baird · Answer

@Luis Prieto, the other thing that you might do is identify all of the small, local lenders.  Some of them will have an appetite for new builds.  The small local community banks have an interest in being the lender for locals.  One of them will likely offer new build mortgages.  So you could work out the refinance on the one side, and hold cash with the cash out...then use the other new build mortgage to get the building commenced, while saving cash for making payments or problems that you cannot identify right now.

Kerry Baird · Answer

@Luis Prieto, good on you for staying with this conversation.  :D  Yes, it is possible to get a HELOC in first position, but is uncommon (hence the answers).  There is one called the All In One first position HELOC.  It has a checkbook associated with it, so you can take draws and use your income every month to reduce the balance.  It requires a 700 FICO and 40% or better debt to income ratio.  Whereas most HELOCs are inexpensive, this one has regular closing costs that are quite high.

Ridge Lending offers this product and offers a calculator so you can see how it works.

Tim Johnson · Answer

Is the property an investment property?  Those can be difficult to get a heloc on?  I would call some local credit unions and tell them what you plan to do and see if they can make it happen.

Amanda Kessler · Answer

A HELOC won't work for you as you need to have something that is built

Tim Johnson · Answer

To my knowledge you can't get a HELCO on something that is not built.  You could go to a owner builder lender.  Many local lumber yards do this if you buy all the materials from them or normandy.com does it.

Chavon Charles · Answer

@Luis Prieto he can definitely get a Heloc on his primary residence or just a cash out refi but I know the issue he may run into his the purpose of the loan you can’t tell them it’s for a business purpose. While working in a bank I did Helocs all the time that people use for other projects just don’t tell the bank that.

How to get a HELOC for building a home myself

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