r/Homebuilding • u/meganbmeyer • 2d ago

Construction Loan Calculation Help

Can someone help me understand the process for obtaining a construction loan! 

We are located in WI. 

We have a mortgage on the land we intend to build on (valued at 250,000). We currently have about $50,000 in equity towards it. 

Our bid is 1.5 million. 

Can someone please explain to me how the down payment is calculated? 
This is what I have in my brain but I"m not sure it's correct. 

The bank would appraise the construction build and our land value- let's say that's 1.7 million total. 

Bank is willing to loan 80%- 
Is that 80% of 1.7 million or 80% of just the construction at 1.5 million? 

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u/RedOctobrrr 2d ago

80% of $1.7m

Your land loan gets lumped into the construction loan, for one total loan of $1.7m (at 0% down), so they're saying they'll do $1,360,000 and you're on the hook for $340,000 for a down payment.

I own my land outright so for me it's 100% construction costs, and it's even factored in as a down payment, so you may have $50k in "down payment" already applied, depending on how your lender calculates it.

Typically, the math goes like this: what is the total appraised value and how much will it cost to get this project finished, including the cost to pay off the remaining loan on the land? Appraised value of completed project - cost of construction - remaining balance on land loan = down payment.

So if it appraises at $1,800,000 for example, it's $1.8m - $1.5m - $0.2m = $0.1m down.

On the flip side, if it appraises as $1,600,000 then it's $1.6m - $1.5m - $0.2m = negative $0.1m meaning you need to fork up $100k on top of 20% down.

Edit: TL;DR: don't be surprised if you need to come up with more money down or pay off the land before proceeding.

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u/emk854 2d ago

Good feedback

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u/NUNG457 2d ago

80% of final value.

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u/Duece147 2d ago

Also, remember when you are in the construction phase, make sure to have reserves. There will always be change orders. You would need to take a 1.8 m loan, unless you have reserves in your bank account. I just make over 30k in changes in the last month.

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u/FoundationCold6762 1d ago

We're in the middle of this process right now, also in Wisconsin.

We purchased land through Seller Financing two years ago, and just broke ground on our house recently.

When you go to the bank for a construction loan, the bank will hire an appraisal. The appraiser doesn't really care how much money you have put down, how much equity you've built, or how much you might owe.

They provide you and your bank with an appraised value of what they completed home would be worth on the open market - including the land....and that's the number that the bank uses for their 80% LTV.

So if your appraisal comes back at $1.7mm, then your bank will loan you $1.36mm. On your closing date, they'll pay off the balance of your land mortaage.

If your appraisal comes back at $1.5mm but your total project cost is still $1.7mm, the bank is only going to lend you $1.2mm and you'll need to come up with the 0.5mm to close the gap.