Interest Rates for Residential Construction Loans

If you’re seeking a ground-up construction loan for a residential investment property, you now have a ton of options with private lending. In this guide, we’ll cover the typical interest rates for residential construction, how the construction financing landscape evolved in 2020, and how to find direct private / hard money lenders that provide ground-up construction loans for single family home developments.

Ground-Up Construction financing in the private mortgage world used to be difficult to find, and offered only by a small number of hard money lenders that had the risk appetite and the expertise to manage them. And most lenders would only consider construction projects in their local market where they have boots on the ground, so in case of a default, they would be able to take over the project and take it to the finish line.

Real estate investors that built single family homes or small residential developments from 2011 to 2020 could typically expect to pay around 10% to 13% interest plus 2 to 4 points (origination fees).

However, the post-pandemic housing boom created a huge appetite for new homes, and Wall Street saw an opportunity. Institutional capital had already flooded the private lending space before 2020, but it was mainly focused on fix & flip loans, and construction was a very limited offering.

In early 2021, capital providers got more comfortable with construction lending and opened up the floodgates. All the additional capital paved the way for ground-up construction financing to go mainstream, on a national scale.

In May 2021, private lending companies listed on our website were advertising interest rates as low as 8% plus 2 points for ground-up construction loans. This pricing is similar to what many lenders charge for fix & flip projects, or a refinance bridge loan with no value-add.

And the lender doesn’t even have to be local with boots on the ground. They can use third-party construction management firms to oversee the project and inspections across the country.

Another thing that’s remarkable about the new construction financing programs from private lenders is it could include the land purchase and horizontal development. Historically, most lenders would not even talk to a developer until a project is  shovel-ready. Now there are many financing options to purchase land, get it entitled, and break ground all with the same lender.

Why Interest Rates for Construction Dropped in 2020

For those who are not familiar with the whole institutional capital thing in private lending, We’ll provide a very brief explanation of how it works. Many real estate investors and brokers may not be interested in this, but it’s helpful to know because it will have an effect on pricing and lending guidelines in the future.

All of those smaller local private lenders that have offered ground-up construction loans for many years are likely managing a small mortgage fund backed by individual accredited investors, or they use a bank warehouse line to recapitalize. But being able to offer construction loans on a national scale is made possible by one of two capital structures.

The first one is a mortgage fund that has been able to attract so much capital from hedge funds and private equity firms, and grows so large that they have no choice but to go national. There are only a handful of construction lenders in this category, and some of them offer wholesale partnerships with other lenders.

We know one private mortgage fund that grew so large, it became a publicly traded REIT. That company is 100% focused on construction loans, and their pricing has been similar to the small local lenders because they haven’t had much competition the past several years.

What really pushed down interest rates for construction loans in late 2020 is the secondary market. What that means is many lenders are funding a construction loan and selling to an institutional note buyer that acquires hundreds of loans from private lenders across the country. So as long as there is a large appetite for construction loans from these Wall Street backed firms, there will be lots of competition for ground-up construction financing.

That said, institutional capital moves with the capital markets. When there is a major economic event, the appetite will change, and so will the pricing and guidelines. The small local private lenders are generally more consistent over the long term, but for now, they will likely have to reduce their pricing to compete with the institutional capital.

Ground-up construction financing is extremely risky, and there may be many challenges ahead for lenders if the new housing market cools down. With construction interest rates on par with less risky loan types like fix & flip or rental bridge loans, you have to wonder if this is just temporary, or if it’s the new normal. Whatever, the future holds, the lower pricing is great news for real estate investors who are building new homes.

How to Find Residential Construction Lenders

You can find direct private hard money lenders right here on our website, and we have a filter you can use to easily find out which lenders consider vacant land.

  1. Start at the Find a Lender page
  2. From the Loan Type list, select Residential Ground-Up Construction
  3. Type in a state or major metro area, and click SEARCH
  4. Browse the list, and use the filters to refine the results
  5. View each lender’s profile to learn about their guidelines, background and more
  6. Scroll down to find the Construction Loan Criteria section. The rates and fees at the top of the page may apply to different loan programs.
  7. Click the green CONTACT button and reach out to the lender directly
May 29, 2021