In the lending industry, the landscape has gone through some dramatic changes in the past several years. The traditional lenders tend to be more speculative as it relates to construction loans to both new and experienced builders. None of these options are wise or sustainable. However, some savvy private construction lenders set themselves apart by helping clients to obtain construction financing using hard money lending options instead of the traditional norm.
The Traditional Lender
Most traditional lenders have an appetite for market fluctuation, but private construction lenders go for continuity and reliability as it relates to financing, and today, most of them continue to keep up the practice. On the other hand, private construction lenders take extra precautions to make sure that risks are reduced; especially if this is a new loan. In addition to the risks, these lenders are quite wary about the impact of doubtful foreclosure inventories competing with newer modeled homes. Most traditional banks will usually not fund new construction loans. However, private lenders are willing to do so as long as the borrowers follow certain requirements.
There are some specific requirements for securing a new construction loan from a private lender.
- Location – It is important that you find out how comfortable your lender is about the area where the property is located.
- Procedure – Become familiar with the draw procedure of the subcontractors or builders. There are some private construction lenders that will fund the loan after doing an inspection of the construction site. However, larger lenders often include the title company before funding is obtained to make sure that there are no liens on the property. You can do your own title search in advance of approaching a lender for funding for your new construction.
- Down Payment – You should request the down payment amount prior to applying for funding. In some cases, you may be lucky to get a ‘no money down’ loan or pay a ten to twenty percent down payment. It all depends on the lender and the complexity of the loan.
- Fees and Rates – Ask your potential lender about the general tees and rates. Usually, if you can show potential profits in your plans, the lender will work to reduce the fees as much as possible.
If you are embarking on a new construction project or upgrading an existing project, you may want to approach different private construction lenders to see which ones offer the best deal so you can make a profit. Be sure to consider all the requirements and the variables that are involved.