Construction Loans: Understanding Property Valuation Before Construction

A construction loan works differently from a traditional mortgage. Many people are confused as to how the lender will determine the value of the property before it is completed. Here are a few things to consider about how lenders assess value on a property that is not yet built.

Value

A lender needs to know the approximate value of the property that it is planning on lending for. Typically, a lender has a loan-to-value ratio that it will want to work with. This determines how much money it is going to lend for a particular project. For example, if someone had a house worth $100,000 and the bank had a loan-to-value ratio of 80 percent, the borrower would have to make a down payment of $20,000.

Determining Value

In this situation, the lender has to rely on the builder and the house plans. It will be able to determine how much the builder is going to charge for the house, and it can look at the plans for the house. By doing this, it will be able to get an approximate value of the property and will then be able to continue processing the loan as normal.