Hard money new construction loans provide fast, flexible financing for real estate investors who want to build their next property.
Instead of focusing on your personal finances, hard money construction loans are based on the overall project costs and the value of the completed property.
Read on to learn more about how hard money new construction loans work, the steps involved in acquiring this type of financing, and how you can qualify.
Get Started with Park Place FinanceWhat is a hard money new construction loan?
Hard money new construction loans are a short-term, specialized type of financing that covers the costs of building a new property from the ground up.
The “hard money” distinction is important because unlike traditional loans offered by banks, hard money lenders are private lenders or lending firms that can structure loans to cater to the unique needs of real estate investors.
Investor projects often are more time-sensitive, and due to the unique lifestyle of an investor, their financial picture may be less straightforward based on typical documentation such as income, employment, and tax returns.
Construction loans from hard money lenders are based on the value of the property itself, and the speed and approval of funding are significantly faster than other sources of financing.
Hard money lenders like Park Place Finance understand the unique requirements of real estate investors and aim to fulfill the need left behind by other institutions to provide fast, flexible financing to this group of individuals.
How does a new construction loan work?
Hard money new construction loans generally cover both the construction costs and related expenses of a new build, including:
- Materials
- Labor
- Permits and fees
- Subcontractor fees
- Land acquisition
- Site preparation
- Architectural and engineering costs
- Repairs and upgrades on an existing property
The specific coverage varies depending on the lender, the project’s scope, and the borrower’s needs.
Borrowers will also be required to make a down payment and pay closing costs and fees, similarly to any other loan type.
When you close on the loan, a portion of the funds goes toward the purchase of the land or property, and the rest is deposited into an escrow account for distribution based on the phases of your project.
What are the steps involved in getting a hard money new construction loan?
To qualify for a hard money new construction loan, the first step is to connect with an experienced, trustworthy hard money lender.
Park Place Finance is a direct hard money lender with in-house capital. We lend nationwide and have been in business for over 17 years.
General construction loan requirements include:
- Presenting a detailed build plan including an estimated timeline, budget, and exit strategy
- Loan-to-value ratio (LTV) above 70-75%
- Bank statement and credit score information
- Appraisal of the property
- Closing costs and fees
- Down payment dependent on project details and equity
In addition to your detailed build plan and exit strategy, it’s helpful to lenders if you can explain any relevant past experience with managing real estate construction projects.
Considerations for New Construction Loans
Ground-up construction projects include a lot of moving parts and considerations for investors.
Before you take the next steps, consider the following points and be prepared to discuss them with your lender.
Short-term loans
Hard money new construction loans generally are short-term loans that align with the project’s construction timeline.
It’s important to establish a realistic timeline that allows you to complete the construction and either sell the property or secure long-term financing within the loan term.
Realistic budget
Along with a realistic timeline, investors must establish a realistic, comprehensive budget that takes into account current construction costs, unexpected expenses, and closing costs and fees.
Creating a buffer in your budget can help you navigate unforeseen circumstances that might arise throughout the project timeline without the risk of derailing its completion.
Interest rates
Interest rates generally can be slightly higher for construction loans, but your personal rate depends on multiple factors.
Discuss construction loan rates with your lender to understand the factors that influence your rate.
Exit strategy
A well-defined exit strategy is crucial to the success of your project—and a large determining factor in whether you’ll qualify for a loan.
You’ll need to detail a clear plan for repaying the loan, whether you’ll sell the property, secure long-term financing, or have an alternate source of funds.
You also should consider a backup exit strategy in case your primary strategy doesn’t unfold as expected.
Local market conditions
Local market conditions can impact the success of your project and determine the ease of selling the property or securing tenants if you’re building a rental property.
Partner with local experts to help you navigate the local market and consider the supply, demand, and economic trends affecting the area.
Fund your next construction project with Park Place Finance
Beyond the previous considerations, your hard money lender’s experience and reputation are crucial to the success of your ground-up construction project.
The right lender has a strong history of successful deals and satisfied clients.
Park Place Finance is here to partner with you and leverage our years of experience and success. We can close on loans as fast as three to five days, and provide borrowers with a dedicated account executive to partner throughout the process.
The Park Place Finance team prides itself on providing a personalized and efficient lending experience. Take a look at what our clients are saying to see what it’s like to work with us.
Ready to get started? Fill out our simple online form or call us at 866-407-1599 to talk to one of our account executives.
Get Started with Park Place Finance