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Structuring the Deal
By Joel S. Pate
Now that you understand the issues that the builder deals with on a daily basis, and you have begun to master the loan products offered by the lender, you are ready to understand the math necessary to put the deal together.
Most CP lenders offer loans that are "Subject To" appraised value and loans based on the "Acquisition" model.
Let's deal with the "Subject To" loan. Subject to means that the appraiser is considering the value of "this set of plans, with these specifications, built on that lot" will be worth X upon completion. That simple definition if memorized and kept simple will eliminate a great deal of confusion that occurs for those that try to complicate the meaning.
Secondly, most lenders have another term that you will need to memorize and understand: "We will loan up to, let's use the example of a 90% LTV, 90% of the "Subject To" appraised value or cost whichever is less."
Now, I suggest that you do not read anything into that statement other than the words listed: The maximum loan amount will be 90% or 80%, depending upon the program, of the "subject to" appraised value or cost, whichever is less.
For example, if you have a set of plans and specs for a house to be built on a specific lot that will be worth $200,000 upon completion and your borrower qualifies for a 90% LTV based on "Subject To" appraised value, then the maximum loan will be $180,000. It's that simple.
But, don't stop there. You have to ask yourself, "How much will the house cost?" If the land, the hard cost to the builder, the closing cost, and even the interim interest only add up to $178,000, the lender will lower the loan amount to the cost, $178,000. However, if the cost total $182,000, the borrower will have to bring $2,000 to closing because the loan can be no more than the max LTV for that value.
Understanding this math is the key to becoming an expert in the Construction Loan business. Until you get this, and know it, you cannot go any further.
Tune in next week, when we discuss "Rate Lock Options", the next phase necessary in becoming a CP Loan Expert.
Dedicated to coaching YOU to CP Loan Success!
Joel S. Pate
Joel S. Pate, a dedicated entrepreneur, has spent more than two decades in the building, mortgage, and real estate industries and has been involved in over $100 Million in construction loans and over $1.3 Billion of residential lending. As the CP LOAN EXPERT columnist, Pate provides straightforward, unbiased advice about every aspect of Construction Permanent Lending.
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