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Financing the construction of a real estate project may seem challenging. If you’re a seasoned real estate investor, you may only have experience finding funding for existing properties, or you may be new to investing and want a loan to help you build a new property. No matter your experience, hard money construction loans for builders can help you obtain the financing you need to start building a property.
Unfortunately, traditional lenders can turn you down for any reason. They have stringent lending requirements, and not all builders will qualify. Luckily, you still have options. Hard money new construction loans can help you build faster and with less stringent requirements, securing the cash you need to start your project as soon as possible to increase profitability.
Planning on building in a residential neighborhood and need funding, or wondering if hard money construction loans are right for you? In this article, we’ll discuss everything you need to know about having money construction loans to help you find the best financing option for your real estate project.
What is a hard money loan?
Hard money construction loans are designed for builders and real estate investors who plan to sell or rent the property when it’s complete. Builders use hard money construction loans for investment projects, including residential and commercial properties.
Hard money loans are not for homebuyers who plan to use the property as their primary residence. However, builders and investors use these loans to build houses, multi-family properties, commercial buildings, or subdivisions.
Hard money loans are asset-based loans that are secured by collateral. With these loans, the collateral is the property being built, so if the borrower fails to pay back the loan, the lender can recoup their losses by selling the property to another builder or renting it out if it’s nearly finished.
Builders and investors typically choose hard money loans because they’re easier to obtain than traditional mortgages since they have less stringent requirements and faster approval processes. In addition, since they’re asset-based loans, hard money lenders for new construction don’t base their decision on a borrower’s credit history and instead consider the value of the real estate project to determine eligibility.
Hard money vs. traditional lenders
When comparing hard money vs. private lenders, you must consider eligibility, interest rates, loan amounts, and flexibility. As we’ve mentioned, it’s often easier to obtain a hard money construction loan than it is to get a traditional mortgage loan because they have less stringent requirements. Real estate investors and builders need constant incoming cash flow, and hard money loans can help with quicker closing times and easier application processes.
Conventional construction loans are issued by banks and other lending institutions, while hard money loans are offered by third-party hard money construction lenders who can create their own lending criteria. These lenders offer greater flexibility and better loan terms. Hard money loans also have a shorter repayment period, allowing builders to start and finish their projects as fast as possible for higher earning potential.
Since hard money construction loans are secured by the property, they often charge higher interest rates. Still, the loan approval process is usually much faster, allowing you to access funds as soon as possible, which can be beneficial if you’re working with deadlines.
How do hard money loans for new construction projects work?
Securing a hard money loan is easier than securing funding from financial institutions because it’s based on more flexible requirements. Hard money construction lenders typically gauge a borrower’s ability to repay the loan by looking at the potential value of the construction project and how much it’ll sell or rent for. Ultimately, the main factor lenders consider is the deal’s profitability instead of focusing on the borrower’s creditworthiness. Of course, they’ll still review your credit history, but the most essential factor of the loan is the project’s value and whether the borrower can repay.
Hard money loan terms vary by lender, but generally, they have four components:
- Assessment: After applying for a hard money loan, the lender will evaluate the real estate project and the opportunity to determine if a borrower is eligible for the loan. They typically do this on a case-by-case basis to determine the overall profitability of a deal.
- Fees & interest rates: All loans have fees and interest rates a borrower must pay. Once the hard money lender has determined how much a borrower is eligible for, they’ll apply fees and set an interest rate. Interest rates are always higher for hard money loans because they carry more risk for the lender. In general, borrowers can expect a 2-5% processing fee and an interest rate of 12-21%.
- Terms: The terms for hard money loans vary, but most are typically paid off within 12 months. However, every case is different, and many lenders will work with borrowers to find the right payment terms for their loans.
- Processing: Hard money loans are faster to process than traditional loans. They can take anywhere from a few days to up to a month, but most are processed within a week or so. The fast processing time is one of the main advantages of these loans for real estate developers on tight deadlines.
Advantages of a hard money construction loan
There are several advantages of hard money construction loans over traditional construction loans, including:
- Faster time to funding: Most deals are funded within a few weeks as long as borrowers can demonstrate their ability to repay based on the profitability of the construction project. Since these loans are processed faster, real estate developers can get to work on their projects sooner.
- Flexible terms: Terms are determined by the type of deal, and since more flexible terms are available, hard money lenders allow borrowers to negotiate to increase the project’s profitability. We look at every application individually to help borrowers get the right terms.
- Convenience: Hard money construction loans are convenient because of the streamlined application and approval process. The underwriting process is fast and easy, and the loan only takes a few weeks to close.
- Flexible down payment requirements: Hard money construction lenders focus on the value of the real estate project instead of other factors. Therefore, they require lower down payments, but the requirement varies by lender.
- High loan amounts: Hard money construction loans offer higher loan amounts to ensure you have the funds you need to build your project as fast as possible.
How do I get a hard money loan?
Obtaining a hard money construction loan is easier than qualifying for traditional construction loans. The process is easy and straightforward to help borrowers of all types get the funding they need for their real estate projects.
Finding a lender
Since the terms for hard money construction loans vary by lender, you’ll want to find one that offers the most agreeable terms. Interest rates, terms, processing time, and loan amounts can affect your real estate project, so consider these factors when choosing a lender to work with:
- Reliability: Always do your research to ensure you’re working with a qualified hard money lender or company. You can check online reviews or review references.
- Processing speed: How fast you can receive funding can impact the profitability of your construction project, so you should discuss timelines with prospective lenders to help you understand how fast you can receive funding after approval.
- Interest rates and terms: Interest rates and terms can also affect your project’s profitability. Hard money construction loans carry more risk for the lender, so they come with higher interest rates, but you can still find a lender with favorable terms and competitive rates.
Filling out an application
Once you find the right hard money construction lender, you can apply. Depending on the lender, there may be an online application, or you’ll need to contact them to begin the process.
You should prepare for the application by having a few key pieces of information and documentation ready to share with the lender, including:
- The address of the project
- The type of project
- Construction costs
- Scope of work
- Exit strategy
- Credit history
- Profit margins
This information allows the lender to easily vet the project to determine whether it’s profitable enough for them to approve a borrower for a loan and determine how much they qualify for.
Apply for a hard money construction loan with Source Capital
Hard money construction loans can help builders, developers, and investors secure the funding they need for their next real estate project faster and easier than traditional loans.
Source Capital makes it easy to get fast, flexible funding for your project, whether you need hard money loans for rental properties or new constructions. You can apply online and receive an approval within 24 hours.
Want to determine if a hard money loan is right for you? Contact us today. We can help you determine if you’re eligible for a loan and whether a hard money loan can help you secure the funding you need for your construction project.