As a property developer or home builder, you know that time is money. While you can choose from many construction loan lenders, private or hard money lenders offer significant advantages over a traditional mortgage lender. Here are just some of the advantages of hard money loans:
- Loans close much faster than traditional mortgage loans.
- Programs range from home construction loans to condominium and multi-family construction loans.
- Terms are based on your experience and the project’s prospects for success.
- Loans come with interest-only payments and a balloon payment on completion.
- There are no prepayment penalties.
Interested? Read on…or contact us for details or book an appointment to learn more.
When financing construction projects, whether you are building or renovating, it is important to thoroughly understand your construction loan – its features, how you benefit, what’s required to qualify, and the application process. Financing a construction project is different than financing a home purchase with a standard mortgage loan. Your real estate investment in the lot, construction costs, and activities in each construction phase will affect your profit. Therefore,when choosing a lender for your construction loan, you must know your options and what considerations to weigh to help you select the right one.
At RBI Private Lending, we’re committed to educating borrowers about the financing alternatives available for their projects and helping them secure the right hard money loan to meet their unique needs. In this blog, we’ll review the ins and outs of construction loans – how they work, why they can be advantageous, what you’ll need to apply and be approved, and why you should consider a private lender like RBI Private Lending as your financing partner. We’ll also share some potential challenges and how to overcome them as well as several tips to ensure you successfully qualify for our construction loan program.
Understanding Construction Loans
Construction loans are used to finance the building of a range of property types. At RBI, we offer them for the construction of:
- Single-family residences
- Two-to-four units
- Multi-family homes
- Other property types (on a case-by-case basis)
There are several distinct advantages of obtaining a construction loan for these particular projects. First, a construction loan provides the necessary funds to cover embedded costs including labor, materials, permits, and other related expenses. Securing such a large amount of capital upfront for a construction project would be challenging without financing.
Second, a construction loan ensures proper cash flow management via the draw process, which we’ll explain in greater detail later in this blog. Third, these loans make it possible to seize construction opportunities in high-demand areas – which yield higher returns once completed. You also stand to benefit from increased property value and rental income (if you are planning to rent once the project is completed). Finally, financing via a construction loan will help you build equity for your next project.
Qualifying for a Construction Loan
Once you’ve determined that a construction loan is the best way to get your project off the ground and ultimately completed, you must prepare to qualify with a lender.
Before all else, become familiar with the credit score and financial requirements necessary to be approved for the construction loan from your lender. And know that both your personal and business financials will be thoroughly reviewed. As such, your lender will require you to provide related documentation and paperwork for verification purposes. They will make an assessment of your financial situation by also weighing income and debt considerations.
Other important financial requirements to be aware of are the required down payment amount and your loan-to-value ratio. These also factor into whether you can qualify.
In addition, you will need to furnish information about your project and those involved in its construction, such as:
- Contractor credentials
- Property information and proof of lot/land ownership (title deeds, zoning info, property surveys, etc.)
- Insurance coverage
- Any legal contracts with the construction team, architect/engineers, or other parties involved
You may also be asked to provide even more documentation as the information a lender needs can vary by project. At RBI, we use this property data to properly assess its value and ensure compliance with local regulations.
The Construction Loan Process
When applying and obtaining approval for a construction loan, the process is fairly straight forward.
- Pre-application phase – Borrower investigates requirements, gathers necessary documentation
- Loan application and approval – Application and documents are submitted, reviewed, and approved
- Construction contract and plans review – Lender reviews all required property-related information
- Loan disbursement and draw schedule determination – Funds are distributed in accordance with outlined draw schedule
- Inspections and project monitoring – Lender conducts necessary inspections and continually monitors the progress of the project
- Transition to permanent financing – Draw schedule concludes and regular payment schedule commences
Finding a Private Lender for Construction Loans
When it comes to construction loans, there are some district benefits in working with a private lender. Private lenders offer more flexible terms and loan amounts than traditional lenders.
Their loan application and funding process is much quicker too. Private lenders are also well versed in the local real estate markets in which they operate. In addition, once you have established a partnership with a private lender, there is the potential for additional financing opportunities once your project is successfully completed.
However, to select a private lender that is a good fit for your project, you must consider a number of factors:
- Loan terms
- Financial stability
Research and compare private lending companies in your area based on these factors to identify where you can most easily navigate the application and approval process. For example, loan terms can vary considerably. At RBI, our standard new construction loan terms are as follows:
- Max Loan Amount: $10,000,000
- Max LTC/ARV (Loan to Cost / Loan to After Completed Value):
– Experienced Investors: The Lesser of 82.5% LTC or 70% ARV.
– Inexperienced Investors: The Lesser of 65% LTC or 55% ARV.
- Rate: Starting at 10.5%
- Term: 12-24 months
- Payments: Monthly Interest Payments with Balloon at Maturity
- Prepayment penalty: None
Managing Construction Loan Funds
One of the most important steps that must be taken to complete a construction project successfully is to create a detailed budget. This is where the draw process comes in. Rather than receiving a lump sum check, construction loans pay out the loan amount over the course of the project. The installments are called draws, as the lender draws funds from the account. A draw request is necessary to ensure disbursement of the funds.
Many lenders do prorated draws, typically 80% financing/20% equity ratios on every draw. RBI loans start once the 20% has been completed. Should you have investors, it is important that they understand the draw process and the difference between money spent and job completed.
In the end, the draw process ensures the proper allocation and use of funds and allows for contingency planning in case there are any unexpected costs.
You have questions. We have answers.
Who are the best hard money lenders in Florida?
Are you looking for private or hard money lenders for your construction loans? Do your research! The best private lenders, whether in Florida or anywhere else, have proven track records that are easily accessible on your County Recorder of Deeds website. Don’t just take their word for it. Ask your lender to show recent transactions they have funded and provide a link to the recorded documents. Beware of companies that advertise as lenders but are just brokers, adding additional fees. As a builder or investor, take your time to research potential lenders and ensure they are legitimate before proceeding. Experience counts. RBI Private Lending has funded over 3,000 loans totaling more than $300 million in the last two years. Our loan programs have financed thousands of projects with attractive construction loan rates, reasonable closing costs, and, most crucially, flexible loan terms and speed!
Will the bank or private lender let me be my own general contractor?
Yes, many home builders and contractors utilize construction loans to fund their own construction projects. You will be subject to the same requirements as those developing investment properties using a third-party general contractor. Acting as your own general contractor should not affect your hard money loan as long as you have experience and a history of successfully repaying your construction loans.
Tips for a Successful Construction Loan Experience
Inherent to the construction process are several potential challenges that can impact your financing. These include construction delays and cost overruns, changes in market conditions and interest rates, and unexpected construction issues all of which require contingency plans. To that end, there are several things you can do proactively to mitigate these risks.
First and foremost, be sure you are engaging with professionals, such as seasoned architects and experienced contractors. And do all you can to communicate clearly and constantly with your lender and construction team. Closely monitor the progress of your project and resolve any issues that arise as promptly as possible. Finally, stay organized. One of the best ways you can do that is by maintaining accurate, up-to-date documentation throughout the course of your construction project.
Now that you have a good understanding of how construction loans work, how to qualify, how you benefit, how to select a private lender and how to ensure a smooth experience, you can confidently move forward and secure the financing you need for your construction project. Take the next steps in obtaining a new construction loan with RBI! Click here for more information.