The continued recovery of the real-estate market may have you pondering the construction of a spec home. When it comes spec home financing learn some of the basics of how these deals are structured,  what a lender will expect from you and how you can increase your eligibility.

Spec home loans are used to construct homes before an actual buyer has been secured. You get a short-term loan to cover the cost of construction. After you finish construction, you either sell the house or refinance to pay the balance of the initial short-term loan. Naturally, when it comes to spec homes, there are a lot of risks involved.

First the lender has nothing to repossess if you default, expect a hole in the ground. Second you don’t even have a buyer in place. Your finished home might sit there for months on end, crumbling to dust and filling with cob-webs, all the while your loan goes unpaid and your lender is at a loss.

Considering all this risk what do you need to do to increase your eligibility?

Eligibility in the Case of Spec Home Financing Comes Down to how likely is it that the property will sell? How much equity does the borrower have in the deal?

In the first place, your lender will want to know the land you aim to purchase has access to roads and utilities. Obviously, your chance of qualifying will be made far more difficult if you intend to build a multiplex condo development in the middle of the woods.

A similar standard comes into play when it comes to your proposed project. A neoclassical surrealist home complete with faux-fur finishes is not going to qualify for financing. Your proposed home should appeal to the average buyer, which assures your lender that after construction is complete, someone will actually purchase your new home.

Also expect to make substantial down payment. The risk implied in these types of deals means few spec lenders are willing to offer more than 85% of projects projected value after completion, so you as a borrower should have the funds on hand to make up the difference.

Some lenders will also want to look into your savings in case your project runs into any unexpected difficulties. They may scrutinize your credit score, tax returns or other pertinent financial documents.

But above all, you need to prove your worth as a borrower when it comes to financing a spec home.

Try these tactics to increase your eligibility for Arizona spec home financing.

There’s obviously a lot of risk in these sorts of deals, and a lender will need a lot more assurance than just a credit score to approve your loan. Good credit or bad, there is no substitute for a compelling business plan. 

Have a very detailed plan with nearly every aspect of your project worked out ahead of time including blueprints, budgets, and precise timetables. Having a clear timeline of how your project will proceed is of vital importance. Your lender will want to know when your spec home will actually be finished, and when they can expect repayment.

Above all, you should be able to tell your lender the “story of your project.”  This story should not be make-believe and based purely on your own conjecture. Have a clear plan which should include projections of the profit that can be earned based on statistical evidence. Look at similar projects in the immediate area and know how much they sold for, this information can lend credence to your projected valuation.

In short, be sure that your proposed project is in line with the realities of the market. But above all have a clear plan. Use evidence to back up your projections. Employing these strategies will increase your eligibility for financing and help you get your spec home project off of the ground.