Seed Capital not going far enough to begin construction

[Account Closed]

Hi, I am having an issue wrapping my head around this. I use my seed capital as a deposit on my new home build loan, I then receive the money in one lump from the bank, and have to use these funds to build the home, market and sell. When do you usually have to start paying off the loan? Do you use the loan itself to pay the loan off while simultaneously building to sell? Or should you have a side hustle to deal with the interest payments? I am struggling to wrap my head around this, can someone please spell this out in Layman's terms?

[Mike Wood]

@Account Closed  In a typical construction loan, you would provide the needed equity as a down payment to the bank. This could be equity in the land owned outright, which would count towards the down payment.  Typically you will need 20% of total cost as a down payment.  

During construction, you would made draw requests (asking the bank for money), which they typically send out an inspector to confirm that the progress made matches the total payments requested.  If you request 50% of the loan, but have only the foundation done (which is likely less than 10% of the value), they will not approve the draw.

For most construction loans, you will make interest payments on the total amount drawn on the loan to date.  These are typically done monthly.  Banks will likely want separate accounts to prove you are not using loan funds to pay the interest payments.  If you are not able to make the interest payments, its unlikely they will approve you for a construction loan, as you need strong financials to get a construction loan approved.

All of the above is applicable to bank loans. While some of the details might be different for a private money or hard money loan, I cant imagine it would be much different.  No one will give you all of the money upfront.  Too much risk that you will just run with the money.  They are loaning money against a construction project, so they will want to make sure that the loan amount dispersed is equal to the value of the construction in its current state.  Builders are used to this draw payment system, so that wont be a big hurtle with them.

Any bank that does construction loans will be able to explain this in detail.