What You Need to Know About Hard Money Construction Loans

Financing for real estate projects can be overwhelming. And when it comes to financing for construction loans, it can appear even more difficult. For many lenders, a construction loan is a highly risky venture that causes loan officers and management to closely look at each detail of the project before they ever make a determination on whether they will fund the deal.

 Mountains of paperwork and unending back and forth discussions with the lender can be the norm in many transactions.

That can be both time consuming and costly if you are the borrower.

  • Time consuming in the fact that your schedule and plans can get delayed and cause major issues for you and your project.
  • Costly in terms of not meeting deadlines to acquire the property or having additional project expenses because of the delays with financing. And every penny of cost overruns has a negative impact on your bottom line when the project is completed.

Because of these issues, you might want to explore the option of a hard money loan for your next construction project. That form of financing might just be what you need to stay on track and get your project done on schedule and within your budget estimates.

Hard Money vs. Traditional Lender Construction Loans

No matter what the state of the real estate market, one thing remains the same – real estate investors need money to fund their projects. And with the changes within the real estate market over the years, it has become increasingly more difficult for developers to get the money they need through traditional lenders in a timely manner. Increasing paperwork and documentation are just some of the reasons for the lag in timely loan closings.

That’s where hard money loans can make a difference.

Hard money construction loans are an important alternative for developers who need the funds to get their new construction project started but may not be a good fit for a loan from a traditional lender. They can also be a great option to consider if your project has specific deadlines to meet and you can’t or don’t want to wait around for the possibility of a conventional or a government loan program.  Let’s explore the difference between hard money vs. traditional construction loans and you can decide which one might be the best fit for you and your project.

Hard Money Loans – Where Does the Money Come From?

While conventional construction loans are issued by traditional lending institutions like banks, hard money loans are provided by hard money lenders or investors and investment groups. This form of lending is not subject to the traditional banking requirements which allows the lenders to have greater flexibility with respect to the loan terms that you receive.

Hard money construction loans are secured by the real estate being purchased and often charge higher interest rates than loans than you might get from a bank. However, any form of construction loan is going to be more costly than a loan on an existing property.

In addition, your lender is going to require that you invest your own capital into the project. What percentage that will be will vary based on the project as well as your experience. However, it’s likely that you would have to invest a minimum of 10 to 20% of the project costs.

While loan approval for a construction project can take several weeks for approval from a bank, they can take months for approval if you choose to go with HUD financing programs. Here’s where the hard money loan programs really shine – you could close in a matter of days depending upon your project and lender.  Because of this, even developers with a strong financial background and access to traditional loans sometimes opt for hard money loans to fund their new construction projects if they want to get them started and done quickly.

Factors to Consider

When looking at hard money vs. traditional construction loans, it’s important to consider the following questions:

When do you need your money?

In the real estate construction industry, time is often an important factor when it comes to project success. Funding a loan quickly can often be the difference between taking advantage of a great deal or losing out on it completely. Though timelines vary when it comes to approving and funding a construction loan, hard money loans tend to be substantially quicker.

While most hard money construction loans can be funded within a week, traditional lenders often take 30 days or more to get you the money you need. This doesn’t even include the application process. The application process can easily run another 2-4 weeks with traditional lending institutions but is often completed in 1-2 days for most hard money loans.

What loan structure are you looking for?

Loan structuring is another concern when it comes to deciding on a construction loan. Most traditional lenders take a one-size-fits-all approach to construction loans. Their terms are set, and there is little wiggle room when it comes to your specific loan requests. Their loan committee wants to only consider projects that meet this set of requirements unless you happen to have a long track record with the bank. In that case there might be more flexibility, but for someone just starting out – expect rather conservative loan options.

Hard money lenders can often provide more flexible loan repayment and collateral release terms. With this kind of loan, the lender has the ability to structure the loan terms in ways that benefit both the lender and the borrower. In addition, they can also provide repayment schedules that are structured to meet the borrower’s unique needs.

Can you qualify?

The bottom line is that getting loan approval is one of the most important factors when it comes to construction loans. There are many reasons why a builder might not get approved for a traditional construction loan. Even if your financial history is strong, the bank may still see something in your application that indicates you don’t meet their set requirements for a conventional loan, such as insufficient paperwork or being self-employed.

New construction
New construction

Hard money lenders are able to take more than just the borrower or company’s financial history into account when evaluating loan applications. A hard money lender will look at your ability to repay the loan as well as what you are contributing to the project. Because they don’t just look at set criteria when deciding on a loan, they are able to fund and are interested in a wider range of projects than a traditional lender.

Local Option

One factor that many investors and borrowers fail to consider is what we call the “local factor”.  Consolidation of banks and other financial institutions means that there can be fewer local lender options for investment projects.

Some of the national lenders to investors and builders are working out of regional or even national offices. That makes it very difficult to develop a close working relationship with the lender. And without that personal and local contact, you have no one to reach out to if there’s an issue with your project or to have someone easily come and see the project for draws requests.

Hard Money Loan Construction Loans or Traditional Lender? Which is Right for You?

When it comes to hard money vs. traditional lender construction loans, the right option for you will depend on a number of factors. If you have been turned down for a conventional loan, then hard money may be just the solution to helping you get your project funded. Similarly, if the less flexible loan structures offered by traditional lenders don’t work for you, then you may want to explore your hard money options.

For many builders, choosing the right type of loan comes down to their timeline. In this business, being able to quickly take advantage of deals and secure land or properties is important. While conventional loans are slower when it comes to approval and funding, hard money loans can be completed and funded quickly, allowing builders to jump on excellent opportunities.  

In the end, the right type of loan for you will depend on what your circumstances are, the project you are considering and what your priorities are. Determining what financing you need and what terms would work best for your project is critical. After weighing the pros and cons of each type of construction loan, consider which loan will give you the flexibility and terms you need to get your project off the ground. Then reach out to a local lender in your area to help you meet your goals!

And if we can help you with a construction loan or other financing option, please let us know. We’d love to discuss your next deal with you and put together the best financing package that  you need to make it a success. Just give us a call at (512) 220-9916 or Contact Us HERE!

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