What is a private construction loan?
These short-term loans can finance the construction of real estate projects. These loans are usually for 12-24 months and help the builder pay for their project.
A portion of the loan proceeds is used to purchase the property upon closing. The balance is kept in an escrow account and is disbursed to the borrower when the project is completed (more details later).
There are two types of construction loans. One is a loan to renovate an existing project (rehab loan), and the other is a loan to start a new construction project. This article will focus on loans for new construction.
Who are Private Construction Loans for?
Like most hard money loans for builders and investors in real estate, private construction loans are. Skilled builders often use construction loans to finance the construction of single-family spec homes, apartment blocks, or subdivisions quickly and easily.
Consumers looking to build their dream homes should use something other than hard-money construction loans. For owner-occupied borrowers, a construction-to-permanent loan might be a more suitable option.
What Types Of Construction Projects Qualify for
Ground Construction loans are available for any type of construction project, whether residential, commercial, or industrial.
These are used most frequently for single-family properties. However, they can also be used to construct condominiums, multifamily complexes and townhouses.
What are the benefits of a private construction loan?
These are the three significant benefits of private construction loans:
- Speed to Close
- Flexible Underwriting
- Asset-Based Lending
Unlike traditional lenders that require borrowers to go through lengthy approval processes, private construction loans are asset-based and require less documentation.
Hard money lenders base approvals on the terms of a deal and the borrower’s credit score.
To qualify for a loan, borrowers can provide proof of employment or tax returns. The lender typically only needs one to two bank statements to confirm that the borrower has sufficient cash to close this loan.
While traditional loans can take up to 3-5 months to approve construction loans, private lenders can approve hard money loans in fractions of the time and often within a few weeks. They also only require some of the paperwork required for traditional financing.
How can I get a hard money construction loan?
hard money new construction loans or “go vertical.” The property must be eligible for the type and size of building the real estate investor is looking to build.
Once the borrower has all the entitlements and plans, they can fill out an application to a hard money lender. The lender must also see the applicant’s credit score and prior experience. They will also want to know about the scope and plans for the project.
The lender will issue a term sheet detailing the loan terms to be offered. These terms may vary depending on the project budget but typically range between 70% to 85% LTC (Loan To Cost). The borrower must pay closing costs and 15% to 30% of construction costs.
After the borrower has accepted the terms, the lender will order an appraiser to inspect the property. The appraiser will conduct the appraisal. While the appraiser is doing so, the lender will collect any remaining items and ensure that the file is complete. After the appraisal has been approved and compelled, the lender will fund the loan by final underwriting.
How are the loan proceeds disbursed?
The builder presents the lender with a scope and budget for a hard money loan during the underwriting phase. It breaks down the project into phases and details how much each phase will be.
After the inspection is complete and the work has been verified, the lender will reimburse the borrower for any outstanding construction costs. The whole process takes approximately 3-5 days.
How are payments made?
There are many types of loans. Hard money loans are usually interest-only. It means that the monthly repayment is only the interest on the loan. It does not reduce the total loan balance.
What should you look for in a Construction Loan lender
There are many hard-money construction lenders. It is easy to find a reliable hard money lender. You can also check which trade associations and organizations they belong to. You can check with the Commercial Lending USA.
Trust. Private construction lenders typically have similar terms, so working with someone you trust who will be honest and transparent and treat you well is essential.
Look at their reviews on Facebook and Google to read what customers have to say. Avoid private lenders who charge high upfront fees to approve your loan. While it is common for the borrower to pay for an appraisal, most lenders don’t charge upfront fees to review your loan.
Is a Hard-Money Loan Right for me?
Private construction loans are a great option if you need money to fund a ground-up construction project. They can be flexible, fast, and save you time.
Private financing is an excellent option for real estate investors, regardless of whether you’re building one house or an entire subdivision. They can focus on their projects and not worry about lengthy approvals, red tape, or endless paperwork.
For additional information and resources on real estate investing, see our FAQ. For more information on our loan programs, contact us directly.