A spec home is built without a buyer under contract: the builder or investor takes the market risk and sells on completion. That is exactly what the lender underwrites. There is no rent and no pre-sale to lean on, so the file has to show that the home can be built for the budget, on time, and sold for comfortably more than the loan.
1. A buildable lot under your control
The lender wants the land owned or under contract, with zoning that allows the home you plan, access, and utilities available or budgeted. If you already own the lot, its value or cost usually counts toward your equity. A lot that still needs a rezoning, a plat or a utility extension is a land deal, not yet a construction deal.
2. Plans and permits
Architectural plans and specifications, and either issued building permits or a clear path to them. Many lenders will issue a term sheet before permits are in hand but will not fund the first construction draw until they are. Permit timing varies a great deal by city, so it belongs in your schedule from day one.
3. A line-item budget with a contingency
Hard costs broken down by trade, soft costs (architecture, engineering, permits, insurance, interest), and a contingency line. The budget becomes the draw schedule, so the lender reads it closely, and an inspector or cost reviewer often checks it against local construction costs.
4. The builder
Either your own record of completed homes of a similar size and finish, or a fixed-price or cost-plus contract with a licensed general contractor who has that record. Builder's risk insurance and the contractor's licence and liability insurance are standard closing items. A first spec home is fundable, but expect lower leverage and a more experienced contractor to be required.
5. The as-completed value
The appraiser values the home as if finished, using recent sales of comparable new construction nearby. That value is the lender's exit test: the loan has to be repaid from a sale at that price, net of selling costs. Your own sales comparables and a realistic list price help the appraisal.
6. Equity and liquidity
At 85% LTC you fund at least 15% of the total cost, often through the land. Beyond that equity, the lender wants to see cash to carry the project: interest if it is not reserved in the loan, cost overruns beyond the contingency, and a few months of holding costs if the sale takes longer than planned.
The approval file, in summary
- Lot: deed or contract, survey, zoning confirmation
- Plans, specifications and permit status
- Budget by line item, including soft costs and contingency
- Construction schedule and draw schedule
- Builder: track record or GC contract, licence, insurance
- As-completed appraisal and comparable new sales
- Borrower: a US LLC with its EIN, a bank statement showing equity and liquidity, and identity and source-of-funds documents
How draws work once it closes
The land portion funds at closing. The construction budget is held back and released in draws: you request a draw when a stage is complete, an inspector confirms the work, and the funds are released, typically against lien waivers from the contractor. Interest runs only on the drawn balance. Passy Capital issues a term sheet in 24 to 48 hours and a clean file closes in about two weeks.
Foreign investors and builders finance spec homes on the same terms through a US LLC, with no US credit history required. On the sale, the buyer will usually withhold 15% of the price under FIRPTA, which a cash-flow plan should account for.