What to Know Before You Apply for Hard Money Construction Loans

Hard money used to be an easier method of getting a construction loan when you didn’t have the time (or the creditworthiness) to apply at a bank or other financial institution. But in just the last five years, even hard money lenders are carefully analyzing every speck and scrap of their prospective borrower’s credentials.

And hard money construction loans are no exception, since these types of projects typically put more pressure on home values in a given area.

Besides this closer scrutiny, consumer regulations have also put private money lenders into a tight choke-hold. New regulations on private lenders put a full-stop to speculative construction loans and construction-to-permanent loans, leaving many builders without a reliable funding source.

And what about banks? Banks have long stopped lending on construction loans. The risk and the speculation involved are simply too high for these types of loans to be a lucrative channel for them.

So what can builders do? There are still some private lenders out there who will fund hard money construction loans if the borrower meets specific lending requirements. So the real question is, what are these requirements and how can you meet them?

Help Increase the Odds of Getting Your Hard Money Construction Loan Approved by Following These Five Tips

1. How much of your money is going into the project? On speculative loans, this can be anywhere from $0 to a 10 percent down payment with a free-and-clear or subordinated lot. With construction-to-permanent loans, you can work with the private money lender for construction purposes, and then refinance out of the hard money loan.
   
   Keep in mind that the private lender requires a 20% non-refundable deposit, but you can roll this amount into the takeout loan.
2. Will some or all of the lot cost be included in the loan? This is usually left to the lender’s discretion as to whether or not they want to include some or all of the cost of the lot in the loan. Generally-speaking, lenders want the loan to be exclusive, or at least put in the first position private-money deed of trust.
   
   In these cases, they may fund as much as 70% of the LTV (loan-to-value ratio) of the appraised value and factor in some of the lot cost into the deal. It all depends on what your lender is most comfortable with.
3. Understand the draw process – Some hard money construction loan lenders will pay the builder directly after the site is inspected – but this is not always the case. Larger lenders will require a title company to be involved and will only pay the builder and their subcontractors after lien waivers are received.
   
   Reach out to your local title company and see if they are doing any new construction loans, and if they are, take the time to familiarize yourself with local title and lien laws, as they can vary from state to state.
4. All about the location – Finally, and this may seem trivial, but be sure that the lender approves of the actual geographic location your new construction is to be built in. You are much more likely to get your hard money construction loan approved if the lender has confidence that this location will be a profitable one.
5. Be comfortable with rates and fees – You may be reluctant when you hear that a hard money construction loan is available at six months with a 12 percent interest rate and 4 points, but that’s because there’s much more to the picture than just rates and fees. Consider the money you could make when the deal is completed right away, rather than having to wait on the sidelines with no funding.
   
   This is particularly true of highly-competitive construction areas. Also consider too that a hard money construction loan can allow you to get a project underway in a much shorter time-frame than traditional financing.
   
   The bottom line is that you must show value from your end of the deal. Lenders see things in terms of profitability and efficiency, so spell out the terms and details needed that demonstrate everything from a front-end closing to monthly payments and final repayments.
   
   By learning more about how hard money construction loans and hard money commercial loans work, you’ll gain valuable insight into the process, and be able to be the first to jump on new opportunities as they become available.