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Construction loan for renovating a personal residence post closing

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  • Construction loan for renovating a personal residence post closing

    Did you guys know it's possible to get a construction loan on a personal residence purchase, essentially to help fund the cost of your planned renovations?

    Essentially what happens is the buyer/borrower will speak to a general contractor or two and get quotes, then the bank will send an appraiser to take a look and give the bank an estimate of value post construction. Then the bank will lend against this future, higher appraised value.

    So if you were buying a property for $1,000,000 and planned on doing $200,000 worth of renovations post closing, the bank might lend you 80% on $1,200,000 vs only 80% on $1,000,000 assuming that the post construction appraised value is estimated to be $1,200,000.

    Keep in mind that rates will be higher, as this type of loan is riskier for the lender. Rates are generally 0.125% higher for this type of loan.

    Market update: Jumbo rates are better now as of this writing in late March 2019, and are half a percent higher for conforming (ironically, conforming loans which are smaller than jumbo loans actually have higher interest rates in the NYC market). 30 yr fixed is 3.75% currently, in Dec we remember buyers being locked in at 5% for a 30 year fixed rate mortgage.

    Pro Tip: When your loan size is over $2mm (limit varies depending on institution), some banks will require 2 appraisals from 2 separate appraisal companies. The bank will view both, and will deem one appropriate. The bank will review the whole report and see which one has more / better information. It's not necessarily whichever one has a lower value.