Don't call a bank and ask if you can finance a home construction project.  In stead, ask yourself if you should. I continually get calls on bad projects.  The frustrating part of it is: when I am honest enough to tell these people not to do the project they get mad at me!  It is not my house.  It is not my project.  It is just numbers to me.  I know you have visions or your kids having their own space and an office for yourself but....  this is the largest investment you have (in most cases)  use your head.  Here are the leading mistakes people make in financing a home construction project. (most of them stem from building with their heart instead of their head. 

--Over building for the neighborhood:  A homes value is determined by the market.  The market being specifically.....the homes around yours that have sold in the past 12 months.  These are your comparable sales.  You do not want to have the nicest (most expensive) home in the neighborhood.  If the largest home in your area is 3500 sq.ft. and yours is 3500 sq. ft.  do not add on to it.  If you have a lot in this same neighborhood, and you want to build, do not build 5,000 sq.ft.  The simple rule is: "if not one home in your area has sold for what your home is worth in 12 months,  your home is not worth what you think it is."

--Piece mailing projects:  Every week someone calls who wants to build a garage with an apartment over it to live in until they build their main house some day.  It's a nice idea but unrealistic.  If you have a parcel with a value of $200,000.00 and you spend $100,000.00 building a garage with an "in-Laws" quarters above it what are you left with?  ... A $200,000.00 parking space with a mortgage.  There is no market for "garages with a view"  If you go to sell, who will buy it?  The bank will ask for "comparable sales" for the buyer to get a loan.  You then need to come up with a list of other "garage/apartments" for  the area in the $300,000.00 range.   

--Unrealistic construction budget:  It is always better to over estimate construction costs than to fall short.  Mainly because of the title ramifications, it is almost impossible to get a second trust deed or equity line on a home which is under construction.  No matter the value, banks to not have such a portfolio.  On the flip side, if you borrow to much money and you come in $50,000.00 under budget what is the damage.  You don't pay interest on the money until you draw it.  You can modify your loan to a permanent loan at the lower balance.  Worst case scenario is: "you paid closing costs of a point $500.00 for access to an extra $50,000.00 that you never need.  It's is a good hedge (or a piece of mind fee if you prefer)

Bad math:  Good ole' fashioned number bumbling.  If you have a lot worth $100,000.00 with a $50,000.00 lien on it and it will cost you $400,000.00 to build a house, should you?  The house next door is for sale for $525,000.00!  Heck why not just build exactly what you want and save capture $25,000.00 in equity?  Because it is bad math.  Until you actually move into a home, every expense is considered a "cost of the home".  For example   Taxes and insurance for the year it takes to build = $3800.00.  Interest on the construction loan through the year = $19,400.00.  A contingency account for cost over runs=  (5% or $20,000.00). Most importantly...the opportunity cost of your time.  If you are an engineer earing $36.00 per hour and you need to invest 150 hours over the year to get a home built, that's $5400.00!  Just buy the house next door.  Spend $15,000.00 adjusting it to your tastes and enjoy yourself.

Wondering if your project is a "good project" , call me I'll tell you.  Paul H. Laak (it's my nature)