Private Construction Loans for Residential Properties – Guidelines, Requirements, Pricing

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.

  1. Start at the Residential Construction Lenders page
  2. Type in a state or major metro area, and click SEARCH
  3. Browse the list, and use the filters to refine the results
  4. View each lender’s profile to learn about their guidelines, background and more
  5. 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.
  6. Click the green CONTACT button and reach out to the lender directly

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

Top Lenders Offering Residential Construction Loans Nationwide

Below are a few private lending companies listed on that offer ground-up construction financing for residential investment properties nationwide (45+ states).

lendingone logo

LendingOne has been funding ground-up construction loans nationally longer than all the other lenders in our network. Here are some of their guidelines and terms:

  • Eligible Properties: Single-family detached, condos, town homes, multifamily
  • Loans Amounts from $500k to $5M
  • Loan Term 12 to 24 months
  • Spec development allowed
  • Redevelopment, conversion and condo loans also permitted
  • Negotiable release prices on multi-asset projects
  • Interest Reserves can be built in