PLUS, if a bank decides at the last minute they don’t want to borrow you money for a new type and price range of property for you.

Federal programs will require you to use GC/licensed folks for a lot of the work and they will get reimbursed by the institution that your loan is with; many GCs don't want to wait on the float time of requesting funds and getting them.Depending on the program and rehab/condition of the home, you may not be required to live in the home (think black mold remediation...bank isn't going to put you in a compromised position) however they may have min/max of when you need to move in.

The "fine print" here is fairly sizeable upfront fees and high interest rates, relative to a traditional construction loan from a bank.  

For a traditional Heloc at most small banks/CU's, the rate will be variable and will be WSJ Prime + a spread that represents the borrower's credit risk.

Welcome to the world of bank loans!

When you are dealing with community banks, they actually like to see diversified ownership. 

Big 3 bank is going to just let this go. 

Make sure you are using an FDIC Fullly Delegated Bank. 

As lenders, well issue a prequal/preapproval letter if we've analyzed your income, assets (bank and brokerage statements to establish that you have the liquidity to afford the down payment, closing costs, and reserves), review credit of the guarantors, review the relevant experience to ensure that we're not throwing our money away on newbies that are wandering around in the dark, and have put together a reasonable plan of attack for the project.

No, banks do not allow a seller held second now a days due to risk and new guide line changes.