I recently was contacted by a potential client who needed financing to finish his home which he had begun with his own cash. He mentioned that he had been unable to find any bank financing on a project where work was already underway. I have financed plenty of homes like this, and there are several general scenarios they fall in.
In my primary market in Eastern Washington, we have a limited construction window due to weather, so this leads to several scenarios in constuction planning. Sometimes, they get their permit too late in the fall to get dried in, but they want to go ahead and get the excavation and foundation done and then wait for spring to start framing. Rather than pay interest all winter long, they pay out of pocket for the early work and then get the loan in the spring to finish. In these cases, their lot equity as well as the amount spent to date are counted towards their down payment.
The weather and schedules sometime lead a builder to want to get going on the house before the client has a chance to get his construction loan.
In other cases, someone started a home and then gave up or their lender took it back, so the buyer wraps together the purchase of the home with the cost to get it finished.
And lastly, a very common scenario is the client that thought they didn't need a loan, but ran out of cash before the project was done.
My recommendation is do your financing homework upfront to make sure you will qualify so that the funds are there when you need them.
Here are some unfortunate negative stories where the client could not qualify for the completion loan:
On a Lake Chelan construction project, they got underway but forgot to pay a couple credit cards and let a small medical bill go to collections; when they came in for the loan, their credit score was too low to qualify.
Someone started construction of a home in Winthrop, in the Methow Valley, and they built a large foundation, and then framed the first floor. When they came to get financing to finish; the expense of finishing it out was more than they could qualify for.
So the bottom line is; if you jump expecting someone to catch you; make sure they are there; likewise if you start a project expecting someone to lend you what you need to finish; do the homework up front so it all goes smoothly.