How to Get a Spec Loan for Construction
Find an improved lot., Choose a project you can quickly complete., Use the land as equity., Bring in partners., Develop a compelling story.
Step-by-Step Guide
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Step 1: Find an improved lot.
Since a “spec loan” is a loan for a construction project without any committed buyers, it is inherently riskier than many other construction loans.
Therefore you’ll maximize your chances of qualifying for the loan if you choose to build on a lot that isn’t completely undeveloped.
In other words, the land needs to be “improved.”Raw land, as opposed to improved land, doesn’t have roads, curbs, water or sewer lines, or electric hookups.
Improved land is more valuable and more likely to be near urban spaces and centers of population, so it’s more likely you’ll be able to find a buyer for your completed construction project. -
Step 2: Choose a project you can quickly complete.
Construction loans are usually short term loans—they last only as long as the length of the project, and the money is paid out in stages rather than all at once.
If you’re new to getting loans for spec projects, it’s best to start with projects that can be completed quickly to minimize the lender’s risk.While the construction loan is active, payments are based on the interest for the amount of money disbursed, so payments are typically low in the beginning.
When the project ends, the money all comes due at once.
The borrower either pays for the balance of the loan immediately, or they get another loan (typically a mortgage loan) to satisfy the balance of the construction loan. , Another way to maximize the chances of getting a construction loan is to give the lender equity in the land.
You could use is as the whole down payment, a portion of the down payment, or some combination of the two.By putting the lot up as the downpayment, the loan is “secured,” which means the loaned money can be recovered in case of default by seizing the securitized property.
Lenders usually won’t credit all of your equity as security.
So if you had $100,000 of equity in the land and you wanted to use the value of your equity as a downpayment for the construction loan, they might give you a credit for that equity of $80,000. , Another way to improve your chances of getting approved for a construction loan is to bring partners into the project.
Partners can do a few things to help your chances in getting approved for a loan.
First, a partner with a better credit history than your own will make the venture more creditworthy.
A partner can also help with a down payment.
Finally, a partner can improve the asset picture of the people applying for the loan if their debt to asset ratio is stronger than the primary applicant’s.
Of course, a partner who is more indebted than the primary applicant can make the financial position look weaker and not stronger. , Spec loans are often called “story loans,” and for good reason.
Since there isn’t a buyer, the lender is loaning money on a possibility.
It’s much more risky.
As a matter of course, you need to work harder to sell the idea of the loan to the lender.
In order to entice the lender to take the risk, you need to construct a story about the project--where it began, what you want to do with it, and where it will end up.
Do what you can to frame the loan as an opportunity rather than a risk.The location of a project is always a major factor in the strength of an investment in real estate.
Since you believe in the location, make the lender believe in the location.
Explain why the area’s infrastructure, development patterns, and the specific characteristics of your construction project make this a worthwhile venture.
For example, if you have a shortage of rental properties in your area and a college sixty miles away is being consolidated with the local university, those are two factors—an increasing demand and a dwindling supply—that might make your project for a new apartment building a worthwhile venture. -
Step 3: Use the land as equity.
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Step 4: Bring in partners.
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Step 5: Develop a compelling story.
Detailed Guide
Since a “spec loan” is a loan for a construction project without any committed buyers, it is inherently riskier than many other construction loans.
Therefore you’ll maximize your chances of qualifying for the loan if you choose to build on a lot that isn’t completely undeveloped.
In other words, the land needs to be “improved.”Raw land, as opposed to improved land, doesn’t have roads, curbs, water or sewer lines, or electric hookups.
Improved land is more valuable and more likely to be near urban spaces and centers of population, so it’s more likely you’ll be able to find a buyer for your completed construction project.
Construction loans are usually short term loans—they last only as long as the length of the project, and the money is paid out in stages rather than all at once.
If you’re new to getting loans for spec projects, it’s best to start with projects that can be completed quickly to minimize the lender’s risk.While the construction loan is active, payments are based on the interest for the amount of money disbursed, so payments are typically low in the beginning.
When the project ends, the money all comes due at once.
The borrower either pays for the balance of the loan immediately, or they get another loan (typically a mortgage loan) to satisfy the balance of the construction loan. , Another way to maximize the chances of getting a construction loan is to give the lender equity in the land.
You could use is as the whole down payment, a portion of the down payment, or some combination of the two.By putting the lot up as the downpayment, the loan is “secured,” which means the loaned money can be recovered in case of default by seizing the securitized property.
Lenders usually won’t credit all of your equity as security.
So if you had $100,000 of equity in the land and you wanted to use the value of your equity as a downpayment for the construction loan, they might give you a credit for that equity of $80,000. , Another way to improve your chances of getting approved for a construction loan is to bring partners into the project.
Partners can do a few things to help your chances in getting approved for a loan.
First, a partner with a better credit history than your own will make the venture more creditworthy.
A partner can also help with a down payment.
Finally, a partner can improve the asset picture of the people applying for the loan if their debt to asset ratio is stronger than the primary applicant’s.
Of course, a partner who is more indebted than the primary applicant can make the financial position look weaker and not stronger. , Spec loans are often called “story loans,” and for good reason.
Since there isn’t a buyer, the lender is loaning money on a possibility.
It’s much more risky.
As a matter of course, you need to work harder to sell the idea of the loan to the lender.
In order to entice the lender to take the risk, you need to construct a story about the project--where it began, what you want to do with it, and where it will end up.
Do what you can to frame the loan as an opportunity rather than a risk.The location of a project is always a major factor in the strength of an investment in real estate.
Since you believe in the location, make the lender believe in the location.
Explain why the area’s infrastructure, development patterns, and the specific characteristics of your construction project make this a worthwhile venture.
For example, if you have a shortage of rental properties in your area and a college sixty miles away is being consolidated with the local university, those are two factors—an increasing demand and a dwindling supply—that might make your project for a new apartment building a worthwhile venture.
About the Author
Sara Wells
Writer and educator with a focus on practical pet care knowledge.
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