Residential Property Construction Lending

Insights about private construction loans for residential properties. What are the typical lending guidelines - max loan-to-cost, interest rates, points, fees, loan term, land entitlement status? Why do developers use private lending instead of bank financing? How to find reputable direct construction lenders in the USA.

Private Lending for Residential Ground-Up Construction

Real estate investors who develop residential investment properties now have a lot of options with private lending, AKA hard money lending. Construction lending used to be limited to the metro area where the lender has a local office, but now you can find lenders that offer ground-up construction loans nationwide.

Private construction financing is only for investment properties.
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.

Although the pricing is higher than banks and conventional lenders, there are several reasons why a builder or mortgage broker would seek private financing for residential developments:

Red Tape
Dealing with banks can be painful and requires so much documentation. Even for real estate developers with strong financials,

Private lending is typically much faster than dealing with banks. Timing is so crucial in construction, and builders don’t want to risk project delays due to a bank’s processes. This is not only critical for the initial funding, it also applies to the draws for each phase of the project. Most private lenders can fund a draw request in 2 to 5 business days.

Typical Guidelines & Pricing for Residential Construction Loans

Below are some of the general guidelines for most of the lenders listed on our platform.

  • Loan Amounts: $200,000 to $50,000,000
  • Loan-to-Cost: Up to 85% of construction costs
    • Most lenders max out at 75% LTC
  • Loan-to-Purchase: Up to 50% for land acquisition
    • Must be entitled
    • Some lenders go up to 65% LTP if project has building permits
  • Lien Position: 1st only
  • Loan Term: Up to 24 months
  • Payment Structure: Interest Only
  • Interest Rate: 8% to 13%
    • Most lenders charge around 10%
  • Origination Fee: 2 to 5 points

Typical Requirements for Residential Construction Financing

Below are some of the general requirements for most construction lenders on our platform.

  • Experience: 1 ground-up project in past 2 years
    • Some lenders require more experience
  • Must have plans and budget
  • Minimum Credit Score: 650
  • Sufficient Cash Reserves
    • In case project goes over budget or takes long to sell