For some, buying your dream home isn’t enough — you want to build it yourself. Or, you’re a developer building for real estate speculation and are unable to get a loan through traditional means. You likely have a lot of questions about how to get started, including how you’ll pay for the many expenses involved.
The admirable venture of home building might require you to get a new construction loan to fund the property purchase and building costs, but getting a construction loan from a traditional institution can be a complicated process.
Since it’s a bigger risk to lenders, getting approved can be more challenging. For example, if you already have a home and are paying on a mortgage, you may not be able to get a second mortgage easily. Or if you’re a business owner, it can be hard to prove your income to meet traditional lenders’ standards.
For many, acquiring a loan through a private money lender may be the best course of action. These loans are evaluated on a case-by-case basis rather than following strict requirements. Read on to see if a new construction loan from a private lender could work for you.
What does it take to get a loan to build a home?
New construction loans cover the costs of building or rehabilitating a home. These are short-term loans with higher interest rates than typical, traditional mortgages, and can include the cost of the land, building materials, and permits.
Due to the extra risk construction loans present, traditional lenders can make borrowers go through even more inspections and regulations than usual. Before you go as far as getting the blueprints for your new build, finding a traditional lender to fund the loan can take months of shopping around to find someone willing to take on your project.
For many, the timing of all of the moving pieces results in delays when you’re on an already-strict timeline to get the house built. If you’re unable to meet the requirements, what are your options?
What’s your loan scenario?
How traditional construction loans work vs private lenders
Construction loans are considered to be higher risk to banks because unlike a conventional mortgage, there’s no collateral to back the loan yet. Thorough and frequent inspections are required, and the way the funds are dispersed also is different. Instead of a lump sum, the builders are paid in installments based on completed work.
More pressure is on both the borrower and the builder with traditional construction loans, because the builder must complete plans within the agreed upon budget and timing. Doing thorough research and providing documentation on potential builders also needs to be added to your timeline in order to prove to lenders that this is not an additional risk to them.
The idea is that once the construction is completed, borrowers will then seek a traditional mortgage for long-term funding for the house. But in the meantime, your funds for construction depend on timelines, detailed planning, and proper budgeting.
Additionally, just like traditional mortgages, your financial details will need to be evaluated, including the following:
- Credit score
- Debt-to-income ratio
- Down payment amount
If you’re an investor considering an equity partner, keep in mind that these partners often want a 50/50 partnership. Even for those wanting just 25% of the profits, this ends up being much more expensive than the alternative — a private money lender.
How a private lender evaluates new construction loans
If you have a growing family in a home and want to start building your dream home, it’s often difficult to get a second mortgage. Many times it’s impossible to sell your home until your new one is built. If you’re an investor or developer looking to build, it can be difficult to qualify for a traditional loan and can take much longer than you’re able to wait before you begin construction.
If your credit score isn’t great on top of that, or you can’t prove your income because you’re self-employed or have other non-traditional finances, traditional construction loans just may not be an option.
In these instances, a private money loan, or hard money loan, could be used to get the funding you need. After building your home, you can sell your old home to pay it off, and then convert to a traditional mortgage.
As an investor or developer, a hard money lender will take into account your specific situation and make a common-sense decision based on what you provide. Plus, if you build a relationship with a hard money lender it can make it much easier to fund future build projects.
Private money lenders are primarily focused on the equity and asset value of the property they are helping to finance. This allows them to take a common-sense approach to loans. If your situation makes sense, they will provide the funding quickly and efficiently.
When a private money loan for construction makes sense
If you are unable to meet all of the necessary requirements for a new construction loan from a traditional institution, or need a more affordable option than a joint venture, a private money loan could be an easy and efficient alternative.
Benefits of a private money loan include:
- Cheaper than a partnership of joint venture
- Low credit scores allowed
- Higher debt-to-income ratio accepted
- Closing in days rather than months
- More affordable than a partnership or joint venture
- Loans based on after-repair value (ARV) and future value of the asset
In instances where the home needs to be built quickly so that you can sell your current home and get your family into the new one, or if you’re bidding on a certain property to build on, closing in months isn’t feasible. The extra time it would take for inspections and other regulations would continue the delays.
In that case, a private money loan’s quick turnaround is a solid solution, and allows you to have more control over the process rather than depending on budgeting and strict timelines that will need to be frequently re-evaluated.
How to get a private money loan
If you need a private money loan for a new construction project, reach out to Marquee Funding Group today so our team of experts can review your unique situation. We specialize in complex, unusual circumstances that still make sense financially but don’t qualify for traditional financing.
Getting a construction loan when you have a more complicated financial situation might present challenges to traditional institutions due to various requirements, but these transactions are typical deals for our team.
We want to build a long-term partnership with those investing and developing so that future projects can be financed with ease.
- Same-day approvals
- Closing in as fast as seven days
- Loan amounts from $50,000 to $20 million
- Loans for single-family, multi-family, commercial, industrial properties, and land
- In-house underwriting, processing, and servicing
Call or email us with questions, concerns, or to get started so we can help you start building your new project quickly and efficiently, or fill out this form to submit your loan request and we will contact you.
Photo by Avel Chuklanov on Unsplash