Hard Money and Private Money Ground-Up Construction Loans

If you’re working in the construction industry, you’re probably already aware that private money lenders have a longstanding history with developers. While banks may sometimes see your efforts as carrying too much risk, new construction loans come with the potential for private lenders. Since the recession, those offering private money construction loans have begun to exercise a little more caution, but they still remain as a viable option.

What is a hard money new construction loan?

A hard money construction loan is a form of finance provided to those who are planning a new residential or commercial building project. How much you’re able to borrow will depend on a couple of factors:

  • The purpose of your property
  • How much you project it will be worth on completion
  • Regulations in your state

As a general rule, it’s possible to borrow up to 100-percent of the vertical costs and 50-percent of land acquisition or refinancing. If your project is very ambitious and the investor agrees it’ll produce returns, you may secure higher land acquisition figures.

Private money construction loan’s interest rates often start at 8.5%. However, as you’ll soon see, you can offset this with your investment efforts.

When do you need a private ground up construction loan?

Using a hypothetical scenario, let’s say you have a construction project in mind, you’ve located a piece of land, and you know that that competition might be high for the property.  The time-sensitive nature of your project calls for a quick close when you’re seeking a ground-up construction loan. Depending on how much information you’re able to provide and the speed at which you deliver it, you could receive your money within one to three weeks.

Hard money ground-up construction loans also work well when your credit score isn’t quite what you’d like it to be. Most brokers can work with scores that are at least 600. On some occasions, there are also opportunities to borrow money if you’re a foreign national. If you look financially risky to a bank, a private money lender may choose to overlook some risk factors in favor of the assets you can deliver. After receiving a report from an independent surveyor that verifies your predicted financial outcome for your construction project, a private money lender may choose to see you as a wise investment rather than a financial risk.

It’s also worth noting that these loans work well when you plan on completing the project and selling the property within 12-18 months. Since short-term loans come with higher interest rates, they still make perfect business sense to the lender despite the reduced time to make gains through interest. In contrast, banks work with much lower rates, so they have little interest in the quick turnaround times that make loans less profitable.

How can you access a ground-up construction loan?

Accessing a construction loan usually means tidying your finances a little. You’ll also need to arm yourself with lots of information about your project costs and plans. Doing so is necessary since your prospective lender needs all the evidence they can get to reassure themselves that you’re worth investing in.

Gather details about the project location, prospective turnaround times, your contractors, and any profit forecasts. To increase the number of people who are willing to finance your project, you may want to use a broker. Brokers understand the private construction loan world more than most people. In addition, they know what their private lenders require in terms of repayment plans. Once they understand how you want to proceed with paying contractors, completing your project, and making payments, they can find a hard money ground-up construction loan match.

If you need to access financing quickly, don’t write off private avenues. Providing your business model is stable, you’ll close the agreement rapidly and bring yourself one step closer to working on your project. If you want to explore private lending options, FCTD can help.