How Big Can Your Construction Loan Be? The Lowest-Number Rule

Your construction loan amount is set by several limits at once, and the smallest one wins. Lenders check the loan against your total project cost, against the finished home's expected value, and against their own program caps. Knowing each test lets you predict your loan, and your cash needs, before you apply.

Test 1: loan to cost

LTC, short for loan to cost, measures the loan against the full project cost: land, hard costs, soft costs, fees and contingency. If the lender's LTC limit is 80%, the loan cannot exceed 80% of that total. Many lenders also set separate limits on how much of the land and the construction budget they will fund.

RSC Private Lending's New Construction program funds up to 75% of the lot and 100% of construction, with the loan capped at 90% of total cost. That maximum leverage is not open to every borrower: RSC's rate table prices borrowers with 3-4 completed builds at up to 65% of the lot and 80% of cost.

Test 2: loan to after-completion value

The lender also compares the loan to what the home should be worth once finished, often called ARV or after-completion value. This protects against overspending on a home that will not be worth much more than it cost. An expensive build in a market with soft comps often makes this the binding limit. RSC caps New Construction loans at 75% of ARV.

Test 3: program caps and coverage

Lenders usually set a minimum and maximum loan size by program. If you plan to keep the home as a rental, the lender may also check whether projected rent can support the eventual long-term loan. RSC's New Construction loans run from $150K to $6M.

Putting it together

Run each test separately, then take the lowest result.

Example (illustrative numbers only): Total project cost is $520,000. Expected value when finished is $640,000.

• At 80% LTC, the cost test allows $416,000.
• At 65% of after-completion value, the value test allows $416,000.
• Change the value to $600,000, and the value test drops to $390,000.

In that second case the loan is $390,000, and the investor needs $130,000 in equity plus closing and carrying costs, not the $104,000 the cost test alone suggested. The percentages here are for illustration, not program terms.

What this means for you

Before you buy the land, run all the tests on your own deal with conservative numbers. If the value test is the one limiting you, a cheaper build, a better lot or a different floor plan may help more than negotiating rate. If the cost test limits you, plan your cash accordingly.

Want to see how big your construction loan could be? Send RSC Private Lending your scenario for a term sheet in 24 hours. All loans are business-purpose and subject to underwriting.