100% LTC Financing for Residential Ground-Up Construction

We have to start off by clarifying that 100% financing for construction projects would never include the land purchase. There is absolutely no way any private money or hard money lender would ever provide 100% of the land purchase plus 100% of the construction costs. That would not make any sense to a lender.

It’s only possible to get 100% financing on the vertical construction costs. So you have to already own the entitled land and have approved building permits in hand, which most lenders refer to as “shovel-ready”. And some lenders will require that the foundation be poured before they fund the loan.

Only a small percentage of private lending companies offer 100% financing for ground-up construction projects. The ones that do so only consider:

  • Residential Investment Properties
    • Single Family Residence (SFR)
    • Duplex
    • Triplex
    • Fourplex
    • Multifamily up to 10 Units
    • SFR Developments (multiple homes)
  • Located in a major metropolitan area
    • No rural areas

100% LTC construction financing is not for commercial real estate or specialty properties. It’s not for cabins or tiny homes that are going to be operated like a hotel. And it’s not for a home that you plan to occupy. Even if you’re building a fourplex where you plan to live in one unit and rent out the other three. That would be a consumer purpose mortgage which private lenders do not consider.

Requirements to Get 100% LTC Financing for Ground-Up Construction

There are several other requirements for getting the maximum leverage on construction financing. First, you must have strong financials and liquid cash. Credit score is important, even to private money and hard money lenders. Some have a minimum of 650, and some require the borrower’s FICO score to be over 700. Besides good credit, you’ll need cash reserves in case the project goes over budget, because the lender will not increase the loan amount before the end of the loan term. The reserve amount varies by lenders, but it could be anywhere from 10% to 20% of the construction budget.

The next requirement is experience with construction projects. If you have not developed at least one property in the past three years, it will be difficult to find a lender, especially for 100% financing. Some lenders make exceptions, but it’s rare. You could make a case if you hire a reputable general contractor as well as a construction consultant to guide you through the entire project. Even then, lenders may want to at least have experience with rehabbing properties.

Why Private Construction Lending Has So Many Requirements

Ground-up construction lending is very risky for lenders. They don’t want to take over your project if you default on the loan. The thinking is that if you have a lot of equity invested in the project, you won’t default on the loan and won’t walk away from it prior to completion.

You may be wondering what amount most private construction lenders will fund, if not 100%. We have a separate guide to cover the typical guidelines for private construction financing, but here’s the short version:

75% percent loan-to-cost is the maximum for most lenders. So you contribute 25% of the construction budget with your own cash, or using equity in another investment property. Some lenders will also fund the land acquisition along with the construction loan, but only up to 50% of the purchase price.

Exit Strategy for Private Construction Loans

Regardless of whether the lender funds 100% or 75% of the construction costs, the key concern for any short-term loan is a solid exit strategy. The preferred exit is for the developer to sell the property upon completion, but we’ve seen an explosion in build-to-rent projects starting in 2019 due to record low interest rates. Construction lenders have accepted the rental strategy because there have been many financing options for residential rentals the past 3 years, and lenders have had confidence that their construction loan will be refinanced. Some developers even build properties to become vacation rentals, and that too has been accepted as an exit. However, at the time of this recording in June 2022, interest rates are rising, and it’s getting tougher to qualify for long-term rental loans.

The rising interest rate environment will have a major effect on construction lending, and the 100% loan-to-cost program may not be available when the market turns. We believe many lenders will stop offering ground-up construction loans entirely, and the ones that continue to offer them will likely become more conservative. For now, the key takeaway from this guide is that if you find a lender that will consider funding 100% of your construction project, you need to have strong financials, lots of liquid cash, and some experience with real estate development.

How to Find Private Construction Lenders

If you’re looking for a private lender to fund a residential or multifamily ground-up construction project, use our website as a resource. 

Option 1: Browse Lenders

  1. Start at the Residential Construction Loan page
  2. Type in a state or major metro area, and click SEARCH
  3. Click REFINE RESULTS if you want to filter the list
  4. View each lender’s profile to learn about their guidelines, pricing, and much more
  5. Click the green CONTACT button and reach out to the lender directly

There is no fee to search for lenders and make contact with them directly. Please remind each company that you found them on PrivateLenderLink.com. 

Browse Lenders 

 

Option 2: Create a Loan Request
Fill out a questionnaire with information about your financing needs. You can then browse lenders and invite a few of them to view your deal. Or ask us for recommendations; we’ll review it and invite a few select lenders that we feel may be a good fit.

Get Started

 

Featured Lenders Offering 100% LTC for Ground-Up Construction Projects

rehab financial group logo

Rehab Financial Group (RFG) is a direct private lending firm that offers 100% LTC financing for ground-up construction projects in 35+ states. Here are some of their lending guidelines:

  • Property Location: 37 States – AL, CO, CT, DE, FL, GA, IA, ID, IL, IN, KS, KY, LA, ME, MD, MI, MA, MO, MS, MT, NH, NJ, NM, NY, NC, OH, OR, PA, RI, SC, TN, TX, UT, VA, WA, WI, WV
  • Loan Amounts: $50K to $1M
  • Land LTP: 0% – We do not offer land purchase money
    • Land must be purchased in advance, have a foundation poured with permits approved for building
    • RFG may refund the cost of the foundation as part of the total loan subject to appropriate ARV limit
    • Experienced builders may qualify for refund of land purchase price
  • LTC: Up to 100% of construction costs
  • Maximum Loan-to-Completed Value: 65% LTCV for credit scores over 700.
    • If credit score is under 700, the max LTCV is 60%
    • Can go higher but Borrower must have the funds to offset the overage
  • Experience Required: 1 verifiably completed ground up within the most recent 12 months
  • Interest Rates: 9.99% to 14.99%
  • Origination Fee: 2 to 4 points
  • Loan Term: 8, 12, or 18 months
    • No prepayment penalty
  • Property Types: SFR, Condo, 2-4 Units, Small Multifamily, Mixed-Use
  • Cash Requirements: Need to cover closing cost and have cash reserves
  • Credit Score: 620 minimum FICO score

Land must be purchased in advance, have a foundation poured with permits approved for building. RFG may refund the cost of the foundation as part of the total loan subject to appropriate ARV limit. Experienced residential property builders may qualify for refund of land purchase price.

We have had a relationship with RFG since 2015.

VIEW PROFILE

 

Private Construction Lending Evolution 2022

While attending the IMN Single Family Rental Conference in December 2021, our CEO, Rocky Butani, interviewed Nathan Trunfio, Managing Director and Head of Sales at Lima One Capital, to get more insights about this topic.

The majority of real estate investors who specialize in rehab value-add deals for multifamily and residential investment properties have had a hard time finding deals since the beginning of the pandemic due to record-low inventory. Some of them have shifted their investment strategy from rehab to development projects, and ground-up construction has become a very popular loan program in the private lending industry.

Increased Competition for Land Acquisition

In addition to the rising costs of building materials and construction labor in twenty twenty-two, investors face another challenge which was the catalyst for the shift to ground-up development projects, and that is low inventory. Starting in early 2021, there has been a huge demand for buildable land in urban and suburban markets throughout the country. If an investor is having a hard time finding vacant land to acquire, they may need to seek improved properties that can be torn down, but those too are in high demand.

Maximum LTV for Land Purchase Financing

The majority of private lenders that offer ground-up construction financing will also fund the land acquisition. The typical LTV is fifty percent of the purchase price for unentitled vacant land, and up to sixty-five percent of the purchase price for entitled vacant land. So investors will need to have a cash down payment of thirty-five to fifty percent for the purchase.


How to Find Private Construction Lenders

If you’re looking for a private lender to fund a residential or multifamily ground-up construction project, use our website as a resource. There is no fee to search for lenders and make contact with them directly.

  1. Start at the Residential Construction Loan page
  2. Type in a state or major metro area, and click SEARCH
  3. Click REFINE RESULTS if you want to filter the list
  4. View each lender’s profile to learn about their guidelines, pricing, and much more
  5. Click the green CONTACT button and reach out to the lender directly

Please remind each company that you found them on PrivateLenderLink.com. 

We also have a great system to make your search for lenders more efficient. Click the ‘Create a Loan Request’ button to enter your deal information. Save it, then invite select lenders to view it, and they can message you directly through our platform. If you’d like some assistance with your lender search, you can click a button to request recommendations from us. We’ll view the deal and invite a few select lenders, some of which may not have a public profile on the site.

Getting Construction Financing Without Experience

We frequently see loan requests on PrivateLenderLink.com from real estate investors who have successfully completed a number of property rehab projects, and they want to make the shift to development deals. The reason for this could be that there are not enough rehab opportunities in the market, or the potential profits in a development project may be higher. But finding private financing for these deals could be a big challenge for real estate investors who’ve never completed a new construction project. Because ground-up construction is far more complex than rehab projects, most private hard money lenders will not consider financing if you have never completed a similar deal in the past.

Experience Requirements for Private Construction Loans

Most private mortgage lenders will require the borrower to have completed at least 2 ground-up construction projects, as the investor or developer, in the past 24 months. Some lenders require 3 or 4 completed projects, and a few lenders require only 1.

If you’ve flipped hundreds of houses or rehabbed lots of multifamily properties, that does not count. Hiring a top-rated general contractor doesn’t help either. However, if you are a general contractor with years of construction experience building for clients, and you’re doing your own investment for the first time, that could make a strong case for a lender. But if you’re a subcontractor with expertise in one or two trades, that wouldn’t qualify because you need to have experience with all aspects of a construction project from start to finish.

Another thing to note is the less experience you have the more cash you’ll need to contribute to the project cost, and you’ll need to have lots of additional cash on hand for reserves, in case the project goes over budget.

Strategies to Getting Construction Financing Without Experience

There are two strategies we suggest which may enable you to get private construction financing without experience.

Strategy #1 – Partner With a Developer

The first strategy is one that most lenders would likely suggest, and that is to partner with a developer who has sufficient experience. This can be a touchy subject for some property investors. You may not want to share the profits on your first deal, or you may not trust a developer to be your partner.

And what if you don’t know any developers with who you can partner with? One solution to that is to start networking in the community where you plan to build. Find out which developers are currently working on projects similar to yours and reach out to them directly. You may be able to meet developers in person at city planning hearings or real estate investment club meetings.

If you decide to use this strategy and you’re able to find a partner, you’ll need to form a new entity for the partnership, and both of you would be co-guarantors on the loan. You can look at this partnership strategy as a learning experience for just one or two projects, then you may not need a partner for future deals.

Strategy #2 – Hire a Construction Consultant

The second strategy we suggest is to hire a construction consulting firm to guide you through the entire project. It’s a rare and unique service, but a construction consulting firm could be a great solution. They can evaluate the project feasibility, estimate potential profits, set up your budget with realistic cost estimates, hire contractors, review inspections, and advise you on all aspects of the project until completed. The cost for this service can add a lot to your budget, but it’s a good alternative to partnering with a developer who will take a lot of the profits.

Now, this strategy is not widely accepted by private lenders, so you’d have to propose this and make a case. It may be best to hire a consultant to evaluate your project and set up a budget before you reach out to a lender. The benefit to this path is the lender can see the consultant’s work first hand. Along with the budget, create a resume for yourself to document all of your past real estate projects, financials, and current assets. Also, you would have to assure the lender that the consultant’s services will be retained for the entire project, not just in the beginning until you get the financing.

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

How to Find Construction Consultants

You can also find construction consulting firms here on our website.

  1. Visit our Service Provider Directory
  2. Click ‘Investor Services’
  3. In the Filter section, select ‘Construction Consultants’
  4. View each company’s profile to learn about their services
  5. Click the green CONTACT button and reach out to the company directly

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

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

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