You have a new residential construction project planned out, but now you need to obtain financing. If you started this process by visiting a conventional bank lender, you probably left their office feeling a bit disappointed. Banks have strict lending requirements that prevent many construction projects from obtaining traditional financing. Fortunately, there are other ways to fund your project.
Here’s a look at five lending options for new residential construction projects:
Bridge loans may be an option if you have equity in another property that you can use while building your current project. Taking cash out of your other property can be a faster way of obtaining financing, as your lender won’t need to evaluate your construction plan or experience (since they’re lending on the completed property).
Construction to Permanent Loans
Construction to permanent loans are available through some banks and offer short-term construction financing, followed by a traditional 30-year loan. In order to qualify for this type of financing from a bank, the borrower must meet all of the requirements for a traditional 30-year loan. These loans are typically designed for homeowners who plan to live in the property after completion, and likely aren’t appropriate for investors looking to sell the property.
Private Construction Loans
Some private lenders, like LYNK Capital, offer loans specifically for investors looking to build new construction projects. This lending option can provide flexibility and fast funding, and lenders will typically underwrite these loans primarily based on the property value and your construction experience. Unlike banks, private construction lenders will not typically scrutinize your tax returns and calculate onerous debt-to-income ratios. Most private construction loans, including ours, are not available for owner-occupied properties. If you’re building a new home with the intention of occupying it yourself, this loan is not right for you. Investors and developers can benefit most from private construction loans.
Hard Money Loans
Many private lenders offer hard money loans. These are similar to private construction loans, but are tailored more for borrowers unable to qualify for other forms of financing. Interest rates on hard money loans are typically higher, but more flexibility may be offered in underwriting requirements. Just like private construction loans, hard money loans may not typically be used to finance owner-occupied properties.
Loans from a Private Investor
If you know an investor with cash available and are able to work with them on your new residential construction project, then great! Private investors can offer the most flexibility for your project if they’re willing to negotiate terms. However, unless you know someone who is an investor or someone who can put you in contact with an investor, financing your project with this option will be difficult.