Here are 5 tips to secure construction financing with a hard money loan
Many believe it is difficult for a homeowner to obtain a loan for secure construction financing. Sometimes this assumption is true. However, with the right tools, information, and the right tools, you can get approved for a building loan. Sometimes it is a matter of getting the right loan from an appropriate lender. These lenders are a great choice for construction financing. Although they may offer higher interest rates than traditional lenders, the difference in cost is often not detrimental to the project. They are typically held for short periods of money so it is imperative to have a clear exit strategy prior to applying for a construction loan.
The latest statistics about the growth of commercial and residential real estate sales have shown that construction loans are highly in demand. In recent years, real estate sales have risen to their highest ever levels. This has created a buyer’s market and reduced inventory. This market is booming. What are the key points to remember when applying for construction loan?
The following five tips can help you get financing for your next secure construction financing project.
- Affordability and loan size. Before you move forward with the loan request or land acquisition, it’s important that you know the monthly cost of a construction loan. The loan’s cost will vary depending on the rate and size. The rate will change based on the borrower’s credit score and down payment. It may also depend on whether the land is free and clear.
- Evaluate different financing options. Construction loans are usually short term, 12-24 month loans that allow enough time for the property to be built and marketed. These loans are usually repaid monthly with interest-only payments. This is an option if you’re building a home to sell. However, if your intention to keep the property, you will need permanent financing to pay the construction loan. There are additional fees for closing the permanent loan. Lenders may offer a one-time closing. This is when a loan starts as a building loan and then converts to a regular loan after a time. This is an option when one wants to build a home and keep it as an investment, or simply for personal use. A lot of lenders will require that the land is free and clear before they will approve a construction loan.
- In interest-carry (or interest reserve), a loan amount is increased by some lenders to cover monthly interest payments. These funds would be added to the loan balance in the same way as a construction draw. These funds allow the borrower to focus on the project, and not worry about monthly payment obligations. They also make it easier for lenders to know that they will be receiving their monthly repayments.
- You should add contingency funds and cost overruns to your budget and loan amount. It’s not unusual for construction projects to go over budget. Lenders like to add 10-15% to cover overruns to their total budget and loan amount. If the funds are not used, the borrower is not required to pay interest unless they have been advanced. Even if the lender has made a contingency budget, the borrower should still be willing to spend more than anticipated. Construction budgets can run out and it is difficult to obtain funds to get the construction work started.
- This is the most critical part of any contractor you hire to oversee construction. Ask for references from at least one bank and ask to see any construction they have completed.
Important to remember that most construction loans only advance funds after the work is complete. The borrower must either have enough cash to pay the expenses until the bank reimburses or contract with subcontractors who can wait until that time. A lot of lenders also reserve 10% for all advances that are not paid off by the due date.