Simple Walkthrough | New Construction Financing

[Steven E.]

Hi folks, my wife and I own an undeveloped parcel of land upon which we plan to build 4 single-family homes. Assume we make it through the process of subdividing, permitting, water/sewer/electrical hookups, environmental assessments, etc. and the parcels are ready to build on...

Where can I find a soup-to-nuts explanation of how new home construction financing works?

My goal is to back into the amount of cash and/or income we will need to show to finance the build of the SFHs on the land.  We want to build the 4 SFHs, then rent them out such that the rent more than covers the mortgages we have on the homes (or the builders loans? not sure)

[Mike Smith]

This is not a soup-to-nuts explanation but here are the basics:

1. Typically maximum of 75% LTV and most lenders want the 25% paid in first via lot equity or you paying for first portion of construction with your cash. Ie, you can't pay the last 25%.

2. LTV is based on an appraisal of plans and specifications. Most lenders somehow instruct the appraiser to come in on the low side of the value range in my experience.

3. Most lenders will only work with experienced builders as new construction lending can be a disaster if the build goes over-budget and there aren't funds to complete the home.  Banks hate owning real estate and they really, really hate owning a partially completed build.