Builders use hard money construction loans to finance real estate construction projects. They are short-term loans lasting 12-24 months, in most cases.
Upon funding, a portion of the proceeds of the loan is used for buying the property. The lender holds the rest in an escrow account. It is then distributed to the borrower as the construction project progresses.
There are two common types of loans used for construction:
- Rehab loans – Used to renovate an existing property
- New construction loans – Used to build a new construction from the ground up (this article’s topic)
How Do Hard Money Construction Loans Work?
Many lenders and banks consider construction loans to be very risky endeavors. Both managers and loan officers pick apart every little detail of the project before making a decision about funding it. This makes it hard for some developers to get the funding they need to start and complete the construction process, even after completing loads of paperwork and negotiating back and forth.
The two fundamental issues borrowers suffer because of this are:
- Loss of Time – Plans and schedules get disrupted, causing time-consuming issues for you and your construction project
- Higher Costs – Project delays lead to higher costs due to the negative impact they have on your ROI, budget, and bottom line
Such issues are why many developers turn to hard money construction loans. These types of loans help you keep your project on schedule, so you stay within your budget.
Hard Money Loans Versus Traditional Construction Loans
Recent changes in the real estate market make it tougher than ever for investors and developers to get the funding they need from banks and traditional lenders to finance large projects. The enormous amount of documentation and paperwork required alone causes major time-consuming delays in loan closings. And let’s face it… time is money.
Hard money construction loans help developers obtain the financing they need faster and with less paperwork. They make it easier for you to meet strict deadlines that you may miss waiting on a conventional loan or a government grant or loan program.
Where Do Hard Money Loan Funds Come From?
Conventional construction loans are funded by banks and other traditional lenders. Hard money construction loans, on the other hand, are funded by the following:
- Investment groups
- Private investors
- Hard money lenders
Because there are no banks or traditional lenders involved, the loan terms are much more flexible. These loans are secured by the property being purchased, which does lead to higher interest rates than traditional loans.
Here are two other differences between hard money loans versus traditional construction loans at-a-glance:
- Bank approvals may take months for HUD programs, whereas a hard money loan can close within just a matter of days
- Lenders generally require a capital investment of 10-20 percent, whereas many hard money lenders will fund the entire construction project
Is a Hard Money Construction Loan Right for You?
The following questions will help you determine whether you should get a hard money loan VS a traditional construction loan:
When do you need the funding?
Land and construction development projects are often time-sensitive. There are often multiple parties involved who all have their own deadlines to meet. Take too long to get the project off the ground, and you may find that everyone, from the surveyors to the landscapers, has bailed on you.
Traditional loans tend to take more than 30 days, sometimes even months, to close. And that’s after the application process has taken weeks to complete. Hard money loans require much less paperwork, which typically takes 1-2 days to complete. You could see your funds in your business account within just one week.
How do you want the loan structured?
What is loan structure? This term refers to the various loan components, such as:
- Repayment terms
- Interest rate
- Loan term
When it comes to loan structuring, most banks and lenders approach new construction loans with a one-size-fits-all attitude. The executives and management set the loan terms, leaving very little leverage for negotiating personalized terms for specified loan requests. Unless you have a long history with the lender, the project must meet strict requirements.
Hard money brokers generally offer much more flexible collateral release and loan repayment terms. Most of these nontraditional lenders will customize loan terms and repayment schedules structured to benefit their organizations as well as you, the borrower, and your unique borrowing needs.
How can you qualify for the loan?
Most developers do not have the capital needed to fund an entirely new construction project. So, getting a construction loan is key to their success when developing real estate. Even if you have a long history with the bank and your financial history is solid, getting approved for a loan may be very difficult. The lender may have a problem with you being self-employed or having insufficient paperwork to prove your financial standing. Basically, the loan officer may insist that you simply do not meet the strict requirements.
Hard money construction loan lenders take other factors into account when assessing applications for funding. They tend to approve and fund a broader array of development projects based on other factors, such as:
- Can you repay the loan in a timely manner?
- What are you personally contributing to the construction project?
Florida Hard Money Construction Loans
There are hard money lenders that finance development projects on a nationwide basis. However, this makes it difficult for developers to create long-lasting working relationships with them. Collaborating with a local Florida hard money lender allows you to communicate with a lender in your own time zone who knows your local real estate market.
If you are seeking funding for a new construction project in Florida, Titan Funding LLC can help you get the capital you need. We provide these types of loans to brokers, investors, and developers across the state.
Give Titan Funding LLC a call at (855) 910-6434 to learn what we can do to assist with your project. Or click here to contact us online now.