Setback No. 375: Appraisal
Received a new appraisal yesterday. It’s better, but still short of what we needed to complete the project. For those of you who are unfamiliar with the lending process, here’s how it works:
Banks will loan you a certain amount of money based on the appraised value of your project. To keep it simple, let’s say your project appraises at $100,000. Most banks lend between 70-80% of the full value of the project. With the example above, that would be $70-$80k.
This percentage is often referred to as “Loan to Value” or LTV.
Of course, it’s not *quite* that simple. In addition to the value of the property, you have other costs to be accounted for. Banks will require an “Interest Reserve” - funds to pay the interest on the loan during the construction phase. If your interest on the loan is around 7%, then you’ll have to add $700×12 months to the project cost. The total number of months depends on the complexity of the project and the bank’s requirements, but in the example above, you’d have to put in $8,400 in interest reserves.
Other fees to be aware of could include title, insurance, and the loan origination fee (usually expressed in points). Let’s say your title and insurance fees run $2000, and the bank charges 2 point ($2000) for the loan. Now you’re up to $12,400.
Ok, so you have the added fees and costs - now you can get an idea of the TOTAL bill.
Let’s say your project is estimated at $90,000. If you add in the $12,400, your TOTAL project costs are $102,400. Assuming the bank will do 80% LTV, that means you have to make up the difference ($22,400).
As you can see, this is why getting a high appraisal is critical. If you don’t have a high enough value, it means you have to bring more money to the closing.
July 24th, 2008 at 7:24 pm