Whether you’re building a new home from scratch or rebuilding a home, new home construction has unique financial challenges. First of all, how do you get money to build a house?
Securing a loan for new home construction isn’t the same as getting a traditional mortgage, and choosing the right type of loan can significantly affect the success of your project.
In this article, we’ll show you how construction loans work, the distinctions between standard and hard money construction loans, and why hard money options may better suit specific scenarios.
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What is a construction loan?
Construction loans were created as short-term loans for financing the construction of a new home or significant renovations.
The big difference with traditional mortgages is that they provide a lump sum for an existing property. Construction loans release funds in stages as the project progresses.
This structure ensures that money is used to cover specific costs, such as materials, labor, and permits.
Construction loans typically cover the following phases:
- Land purchase (if applicable)
- Site preparation
- Construction and development
- Inspection and final touches
Borrowers often choose a loan that transitions into a permanent mortgage, sometimes called a “construction-to-permanent” loan, once the home is complete.
Standard construction loans vs. hard money construction loans
Not all construction loans are created equal.
Borrowers can choose between traditional bank construction loans and hard money construction loans, each with distinct advantages and limitations.
Standard construction loans
Banks or credit unions typically offer standard construction loans and adhere to conventional loan criteria.
Here’s what you can expect:
- Eligibility requirements: Banks require strong credit scores (often above 680), a detailed construction plan, and proof of consistent income.
- Approval process: The application process is rigorous and can take weeks or even months. Lenders will want to thoroughly review your financial history, employment status, and the feasibility of the construction project.
- Payment terms: Standard loans usually have lower interest rates but stricter repayment schedules.
- Flexibility: Banks often require extensive documentation, including contractor bids and project timelines, leaving little room for unexpected changes during the build.
Hard money construction loans
In contrast, hard money construction loans are funded by private lenders or institutions like Marquee Funding Group.
These loans offer flexibility and faster approvals, making them an attractive alternative for borrowers with unique needs.
Key characteristics of hard money construction loans include:
- Simpler qualification criteria: Hard money lenders prioritize the value of the collateral (the property itself) over personal credit scores or income levels.
- Faster approval: With streamlined underwriting and a focus on asset-based lending, approvals can happen in days rather than weeks.
- Customized solutions: Hard money lenders are more likely to accommodate non-traditional projects, such as:
- Custom builds
- Unconventional designs
- Multi-unit developments
- Shorter loan terms: Typically ranging from 6 months to 3 years, these loans are designed for the duration of construction and are often paid off through a permanent mortgage or property sale.
Why choose a hard money construction loan?
Hard money construction loans can be a game-changer for the right borrowers, especially those facing traditional lending challenges.
Speed and efficiency
Timing is typically one of the core aspects of construction projects. Financing delays can stall progress and increase costs.
Hard money lenders, like Marquee Funding Group, understand this urgency and can expedite the approval process, often disbursing funds within a week.
Greater flexibility
Private lenders are more willing to work with borrowers on unique or complex projects than banks.
Whether you’re constructing a luxury home, a fixer-upper with major renovations, or a multi-family development, hard money loans provide the adaptability you need to bring your vision to life.
Less stringent qualifications
Traditional lenders may deny applications outright for borrowers with lower credit scores, inconsistent income, or a history of bankruptcy.
The primary consideration of a hard money lenders is the property’s value and potential, allowing more borrowers to qualify for the funds they need.
Overcoming unforeseen challenges
Construction projects rarely go exactly as planned. Material shortages, labor delays, and design changes are common hurdles.
Hard money lenders offer the flexibility to adjust loan terms or provide additional funding if unexpected costs arise, ensuring the project stays on track.
Access to expert guidance
Private lenders, particularly experienced firms like Marquee Funding Group, often bring industry knowledge.
Their expertise in construction financing can help borrowers navigate complex projects, ensuring smoother progress and successful outcomes.
Steps to secure a loan for new home construction
- Define your project goals: Develop a detailed plan that includes the home’s design, size, features, and timeline. This information will help lenders assess your project’s feasibility.
- Estimate costs: Work with contractors, architects, and other professionals to create a realistic budget for labor, materials, permits, and contingencies.
- Research lenders: Determine whether a standard construction loan or a hard money construction loan best suits your needs. Consider factors like your credit score, timeline, and project complexity.
- Apply for the loan: Prepare the necessary documentation, such as construction plans, budget estimates, and proof of land ownership (if applicable).
- Obtain loan approval: If approved, work closely with your lender to establish a disbursement schedule since funds will be released in phases, often requiring periodic inspections.
- Begin construction: As funds are distributed, ensure that all payments are tracked and construction progresses according to plan—maintain clear communication with your lender to address any unexpected changes.
- Transition to permanent financing: Once the home is completed, secure a permanent mortgage or sell the property to pay off the loan.
Is a hard money construction loan right for you?
A loan for new home construction is not a one-size-fits-all solution.
While standard loans may work for borrowers with easily predictable finances and conventional projects, hard money construction loans stand out in situations requiring speed, flexibility, and creative solutions.
Marquee Funding Group specializes in providing customized construction loans tailored to the needs of builders, investors, and homeowners.
Our common-sense underwriting, quick approvals, and deep understanding of the industry can make us an invaluable partner in bringing your best construction project to life.
Ready for the next step? Get Started on your dream home financing options with Marquee Funding Group.
We have expert team members who can guide you through the process, ensuring your project has the financial foundation it needs to succeed.