Construction Lending
For the Investor

A quick search on Google will give you an immediate catalog of literally thousands of construction lending programs. The question becomes, "How do I know which one is right for me?" This short questionnaire may help point you in the right direction:

1. Will this house be an investor property or do you plan to live there?
2. Do you have a lot in mind? Do you own it? If not, will you need lot financing?
3. How much money can you contribute to your project?
4. Can you qualify for bank financing? How much? Are you willing to?
5. Do you already have house plans or are you starting from scratch?
6. What is your timeframe?
7. Are you a general contractor or do you have one to work with?
8. Do you know your cost per square foot to build? Do you know what your finished house should sell for?

While this is certainly not an exhaustive list, if you can answer these questions, you will have taken your first steps toward a relatively untapped niche in the personal Real Estate investor market. Construction lending, like any other investor lending market, can be broken down into at least two major divisions: Conventional - loans offered through banks, mortgage companies and other financial institutions and Non-Conforming, also called Subprime or BC. This is where you would find Private/Hard Equity Loans. These are offered through various niche lenders and private groups or individuals. Each division has its own set of benefits and where you belong depends
on you.

Imagine a line or continuum. At one end is good terms. This refers not only to interest rates and loan-to-values but also to when interest charges begin. At the other end is ease of use. This refers to the logistics of receiving the borrowed funds and applying them to the building project. Those who are willing and able to qualify for "conventional" financing will enjoy better terms than those who are not. However, as a general rule, the receiving of the borrowed funds requires a more arduous process than if the funds had been borrowed from a Private/Hard Equity lender. The borrower who chooses private funding will normally experience a more streamlined approval process and a more flexible draw procedure, but they will be trading terms to get these. The ultimate course is not always a matter of choice. The underwriting guidelines may dictate the path the borrower must take.

If you are an individual with good credit, stable employment, a down payment, and you are an owner/builder or have hired a contractor to build a primary residence for you, your choices will be many. As those items of qualification are removed, the spectrum of available choices will narrow and ultimately disappear completely.

If you happen to be a contractor and you would like to build spec homes for resale, it may be difficult to find low interest financing without other mortgageable assets to support your position. In this case, Private/Hard Equity financing may give you the resource to start your business and run it until you can qualify for bank financing, if you should later choose to. It should be noted here that more than one builder has told us that after starting their business with private money and later "graduating" to bank financing, returned to their private lending roots because they found elements of the logistics of dealing with bank financing to restrictive.

This short article may have created more questions for you than it answered, but the idea here was simply to expose you to some broad streams of thought. If you are interested in borrowing for construction projects, if you have general (or specific) questions, or if you would like input on the feasibility of a project you may be considering, please do not hesitate to contact us.