I searched on this but can't find anything. Maybe that's a bad sign. Basically my situation is this. I own a lot free and clear and want to build a home on it with a mother-in-law unit. We want to live in one unit and rent out the other.

We are currently renters and this would be our first home, so we don't can't do it with a home equity loan, but I can't find any construction loans that let you build a multi-unit property. Does anyone know where you might find one? Does anyone know why this is the case? From a lender's perspective, doesn't the prospect that the borrower would have rental income make it more attractive?

Rick

Rick:

You probably can’t find information on this because there is no product called ”construction loan for home with mother-in-law unit”

Taking into consideration that I am not a residential lender, I can tell you that you can finance the construction of a duplex as a primary residence with you living on one of the units and renting out the other to a tenant. I do not know the specifics of that deal, but I know that it happened in one of the financial institutions where I worked. If you can finance a building where essentially half of the property will be used for rental, I do not see how much more difficult it would be to finance one where a proportionally smaller percentage of the living space will be used for rental.

I think that the easiest way to get financing would be to show that your personal income will be enough to service the debt. If you have to start relying on the rental income from your mother in law, then the lender is going to want to make sure it is there.

In your position, I would talk to a residential lender about a construction loan and ask the lender specific questions about the financing such as:

1- Any additional down payment on top of the lot contribution?
2- How much loan does your income qualifies you for?
3- Can you count on the contribution from your mother in law for debt repayment.
4- What would be needed in order to support this rental income? How about a lease?

Good luck, and don’t be worried because you haven’t found the exact description does not mean that you are not a candidate for a regular construction loan of the residential type.

Actually, it's not that simple...

- I searched for info on duplexes, multi-family, etc etc.
- We are planning to finance based on income.
- We are planning to use it as a primary residence.
- We have spoken to some banks (Bank of America, Washington Mutual, Yosemite Bank).

The banks will
- lend to you to buy a pre-existing duplex (and in that case you can count rental income)
- lend to you for construction for single-family dwellings.

Most banks will not give you a construction loan to build a duplex. They told me my option woudl be to use a home equity loan during construction and other options that do me no good (because I don't have home equity).


I finally found that IndyMac does in fact offer such a thing, so that's a relief. I hope they still offer it when we need the money (it's a bit off right now). I'm surprised it's so hard to find though.

Rick:

As I said before, Iam not a residential lender, but I do remember one of my bank employers giving the owner of one of our corporate lending customers a construction loan for him to build a duplex that was managed through our consumer division. {in other words, I do not know the particulars}

As an analyst, it would make sense to me that if your income is high enough to repay the debt without having to count on rental income, then the deal is a no-brainer when it comes to "source of repayment". I am surprised that you met resistance.

Anyway, I am glad to hear that you found an institution willing to do it.

Good luck

I definitely understand you're not a residential lender and don't have expert advice on this. I appreciate the thoughts anyway because you certainly know more than I do.



That's what I thought. I said "I would think that the potential for rental income would be a point in our favor" and the first three banks just said "Well the loan isn't structured that way". Anyway, it appears that it won't be a problem, but

One of my neighbors came up with two ideas of last resort that I thought I'd share for tohers who might check in here.

1. Go to a brokerage and get private money. That's what he did for his duplex becuase he had bad credit - a broker set him up with guy who owns a lot of rental property. The came up and looked at our neighbor's property (same street as where we want to build on) and thought it was a great investment and wrote him a check.

2. Just get your house built and plan it so that you can eventually divide it and add a second kitchen. If you're willing to suck it up and live in a smaller apartment for cheap, then you can rent the main unit until you have the cash to wall off the passage between the two units, throw in a kitchen and you're converted. In our case, my wife has access to employee-subsidized housing through work. It's terrible, but incredibly cheap, so we could live there during the main vacation rental season until we have enough money to add the kitchen with our own cash. That's sort of a special situation so I don't know as that helps anyone, but I thought I'd throw it out there.