Where To Find Money
As mentioned earlier, you should line up all your construction funds, including buffers and reserves, before you break ground. If you run short on funds after construction has started, very few lenders would be interested in the loan. Lenders don’t want to work with someone inexperienced; and they worry about “broken priority” in the lien position.
Here are some typical sources of construction funds:
Your own savings or investment account. Make sure you account for market fluctuations and capital gains taxes if your investment account is your primary source of construction funds. With capital gains taxes, this could be a surprisingly expensive funding source.
Your home equity line of credit (HELOC). If you have a healthy HELOC, this is a good, low-cost source. Just make sure you have the ability to qualify for a re-financing after your construction. Get yourself pre-approved.
Your brokerage account investment line of credit (LOC). This is typically secured by your stock holdings, at 60% to 70% of the valuation. Be prepared for market fluctuations so that you will have sufficient funds to complete the construction project.
Your friends & family.
Construction loan – Most construction loans will be in the ballpark of 60% to 65% of the “As Completed’ appraised value, with some of that used to pay off any and all outstanding mortgages so the construction loan can be the first mortgage (also called “first deed”). The construction lender will also deduct from that amount the interest reserve for the holding period. You need to come out of pocket for any construction cost shortfall.
Yes, there are other options (see our planning tips), but plan carefully. Construction projects are subject to a wide range of risks, such as permitting delays, supply chain issues, labor shortage, tariff). Plan ahead to manage your risks.