The traditional approach to new construction financing involves a two-step process. The first step is placement of an interim construction line of credit (LOC) with a local bank. The LOC is used to pay off the land/lot purchase price if the parcel is not currently owned by the borrower. The residual LOC is used to fund builder draws. Upon project completion a permanent mortgage is funded to pay off the LOC. This approach requires the borrower to contribute 20% equity of the total development cost. This equity can be in the form of existing land equity or contributed cash or a combination of both.
An alternative to the traditional two-step approach is the One Time Close FHA or VA program offered by Primary Residential Mortgage, Inc.. There are numerous benefits of this program, the chief one being that for the FHA program only 3.5% equity of the total hard costs (construction) and soft costs (program fees) is required from the borrower. The VA version of this program requires $0 equity. Construction management fees and loan costs tend to be a bit higher with this program than the traditional approach but the key advantage is the reduced equity requirement.
Primary Residential Mortgage also offers a renovation loan program. This is a conforming purchase money first mortgage that will fund the acquisition of a single family home and fund post-closing renovation/repair to the subject property. There's a ratio of acquisition price to repair cost but there's a liberal allowance of the degree of renovation that can be funded. A key point is that upon closing the home must be 'habitable', meaning, this program cannot be used for general, full scale home development. 406-542-1972