In this guide, we’ll explain the typical hard money lending guidelines for residential ground-up construction loans, the requirements, typical pricing, and how to find direct private construction lenders.
Before 2020, a small percentage of private hard money lenders offered ground-up construction financing because it’s so much riskier than a rehab or bridge loan. But starting in late 2020, construction loans became more mainstream in the private lending industry for single-family homes, townhomes, and small multifamily properties in urban and suburban areas. The exit strategy can be to sell the property upon completion, or rent it and refinance with a long-term loan. No private lender will provide a construction loan for someone who is planning to occupy the home as their primary residence or a 2nd home. Private and hard money lending is only for investment purposes. And it’s only for experienced investors.
Guidelines & Requirements for Private Construction Loans
Experience is the first requirement for getting private construction financing. Most hard money lenders require you to have completed 1 to 3 construction projects in the past 2 years. Rehab experience won’t typically qualify because ground-up is so much more complex. If you have never developed a property or managed a construction project from start to finish, it will be difficult to get financing from a private or hard money lender.
Maximum Loan-to-Cost for Residential Construction
Once the project is shovel-ready, most hard money lenders will max out at 75 percent of construction costs, and some will go up to 85 percent. So you will need to contribute 15 to 25 percent of the total project costs in cash. Very few lenders will consider using the land equity instead of cash, but it may be possible. And if you own another investment property which is already built, a lender may be able to take a 1st or 2nd mortgage on that property as collateral instead of cash. Even if you use another property as collateral, you will still need to have some cash reserves in case the project goes over budget or the exit takes longer than expected.
Financing the Land Development
What if the project is not yet shovel-ready? Well then you’re still in the Land Development stage, and the majority of private construction lenders want nothing to do with that. As mentioned earlier, more and more lenders are becoming comfortable with financing development projects, so some lenders will consider the land development but only if they are also funding the vertical construction. If you do find a lender that will fund the land purchase, the leverage depends on which phase of development you’re in.
For a project that has entitlements but no building permits, the maximum LTV is 50%, so you’ll need to contribute 50% of the purchase price in cash. If the project is approved and you have building permits in hand, a lender may go up to 65% LTV. And by the way, the maximum loan-to-value is the same thing as the loan-to-purchase price. Lenders don’t care if you think the land is worth much more than what you’re buying it for. To a lender, the purchase price is the value.
In order for a lender to consider including land in the financing, it must have entitlements. If the project is not entitled, you will likely have to find a different private hard money lender that is comfortable with funding bridge loans secured by unentitled land, and you’ll still need to contribute at least 50% of the purchase price in cash.
Typical Interest Rates and Fees for Private Construction Loans
So what is the typical pricing for ground-up construction financing? Prior to 2020, most lenders were in the range of 10% to 13% interest plus 2 to 4 points in origination fees.
However, at the time of this writing in June 2021, we are seeing a lot of lenders advertising rates as low as 8% plus 2 points for shovel-ready construction projects. If your project includes any land development, you likely won’t get the lowest pricing.
The recent drop in pricing for construction loans has been fueled by low interest rates, which caused a huge demand for new homes, and there is a lot of capital available that is attracted to homebuilding. When the housing market cools off, we may see interest rates for private construction loans go back up above 10%. Or maybe not.
Other Fees Besides Interest and Points
In addition to interest and origination fees, you’ll have to pay for closing costs and inspection fees. Throughout the project, the lender will need to frequently visit the job site to confirm that each phase has been completed.
Most lenders hire a third-party service for this, but if the job site is within driving distance to their office, they will likely send someone from their company to do the inspections. Some lenders waive the inspection fees when they do it themselves.
Interest Charged on the Entire Construction Budget?
Another item to consider along with the pricing is whether you have to pay interest on the entire loan amount, or only on the funds drawn. These days it seems to be about 50/50 with half the lenders in our network only charging interest on dispersed funds. For many lenders, this is not possible due to their capital structure and/or licensing. For example, lenders in California that are licensed by the Department of Real Estate are required to put the entire construction budget in a third-party escrow account, so they can’t use the money for other lending activities. Therefore, they have to charge interest on the entire loan amount. This is also known as Dutch Interest.
How to Find Residential Construction Lenders
You can find direct private hard money lenders right here on our website. There’s no fee to search and no registration required.
- Start at the Residential Construction Lenders page
- Type in a state or major metro area, and click SEARCH
- Browse the list, and use the filters to refine the results
- View each lender’s profile to learn about their guidelines, background and more
- 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.
- Click the green CONTACT button and reach out to the lender directly