With the latest tech advances and sophistication in design and execution, construction plans can be completed swiftly and efficiently—provided you have the funds to set everything in motion. Since the capital investment is massive, people often apply for traditional or hard money loans for construction projects.
Traditional construction loans have strict qualification requirements and a lengthy approval process. If you cannot access a traditional loan fast or at all, a hard money loan can help you complete construction work within the stipulated time.
Before getting a construction loan from a hard money lender, use our guide to learn about all the critical areas of the transaction, including:
- Typical interest and repayment terms
- Qualifications (for both commercial and consumer purposes)
The Basic Difference Between a Traditional and a Hard Money Construction Loan
Traditional construction loans are offered by banks and mortgage companies to individuals, businesses, and property developers. According to a 2022 report released by S&P Global Market Intelligence, the U.S. banking industry had over $400 billion riding on residential and non-residential construction loans, with the former growing at a faster pace.
Despite the demand, traditional construction loans are serviced according to a watertight and inflexible approval process, consisting of aspects like:
- Financial health check (credit score, tax returns, and debt-to-income (DTI) ratio)
- Analysis of construction documentation, such as:
- Layout drawings
- Estimated material and labor costs
- Stage-wise completion timelines
- Projected revenue generation (in case of commercial construction)
A minor flaw in your paperwork, construction scheme, or financial history can cause months of delay in approval, causing your project to come to a standstill. The losses are particularly unforgiving when you’re dealing with sunk costs in business while losing potential revenue streams.
A hard money construction loan is the solution for people who either don’t qualify for a traditional loan or need funds fast. Hard money lenders operate privately and offer a fast and uncomplicated lending strategy. These lenders rely on the value of the collateral—in this case, the asset under construction—to approve the loan, so your financial health and other factors have little bearing on their decision.
Source: Denniz Futalan
Typical Terms of Traditional vs. Private Construction Loans
Private or hard money construction lenders offer quicker funding with minimal verification steps, which means they are taking on a greater risk than traditional lending institutions. The risk factor makes the interest rates on hard money loans higher than on traditional ones.
Go through the following table to understand the comparative terms for hard money and traditional loans:
|Aspect||Traditional Construction Loan||Private Construction Loan|
|Loan tenure||5–15 years||1–3 years|
|Origination fee||Up to 3%||Up to 10%|
|Loan-to-value (LTV) or loan-to-cost (LTC) ratio||Up to 95%||Up to 75%|
|Disbursal or the principal||In installments, depending on the progress of the construction (the lenders evaluate on-site progress and compare it against the timeline submitted in the project documents)||Usually in a lump sum|
|Repayment||Amortized monthly payments (some commercial lenders allow deferring repayment until the project starts generating revenue)||Interest-only, the principal is repaid at the end of the tenure—deferment period is not common in non-traditional lending|
Keep in mind that these are estimated figures and terms based on the loan packages dictated by popular lenders. The rates can fluctuate according to cost components like labor and transport rates, which vary from state to state.
What Type of Construction Can Hard Money Loans Support?
Hard money construction loans are available for all kinds of construction, personal or commercial. The four most commonly observed projects are:
- Residential units—Most hard money construction loans are used for building residential homes, including:
- Single-family homes
- Multi-family homes (apartments)
- Commercial structures—These can be office buildings, retail stores, hotels, and similar structures with complex plans that take a while to get approved. Builders often use hard money loans to proceed with construction during the buffer period
- Industrial facilities—Like with commercial structures, it takes months for banks to approve the construction of an industrial facility. Hard money lenders facilitate bridge financing and help manufacturers honor their production deadlines
- Institutions—Schools, churches, hospitals, and universities use hard money loans to propel urgent construction projects when there is a delay in government-backed funding
Source: Gustavo Fring
The type of construction project usually influences the loan tenure, interest rates, and legal compliance in certain cases. The hard money lender also checks if the borrower needs funds for new construction, renovation, repairs, remodeling, or expansion to finalize the terms of the loan package.
How To Qualify for Hard Money Construction Loans
Hard money lenders require far less documentation to get started—in most cases, you have to submit basic paperwork about your business and collateral. These lenders avoid micro-analyzing every aspect of your construction plan but are particular about:
- Your equity investment in the project—to calculate the risk of default
- Value of the property offered as collateral—to determine the LTV or LTC ratio
For under-construction properties, the lender would conduct the necessary due diligence about the construction cost and estimated time of completion. The hard money lending industry is fuelled by long-term professional relationships between investors and borrowers. Even if you don’t have a bullet-proof construction plan, you may qualify based on the value of your collateral, your past dealings with the lender, and your overall reputation as a business unit or property investor.
Can Homeowners Qualify for Hard Money Residential Construction Loans?
Yes, homeowners may qualify for a hard money construction loan if they can prove that they can pay it off. A hard money lender wants to ensure the borrower has enough cash flow to cover the interest payments. Based on the type of borrower, here’s what the lender usually checks:
|Type of Borrower||Factors Influencing Cash Flow|
|Property investor/flipper||Resale value of the property|
Location and saleability
Annual rental value (if it’s a rental investment)
|Business entity||Monthly or annual revenue stream of the business|
Estimated lifetime cash flow from the asset
Other debt obligations of the entity
|Homeowner||Borrower’s financial health|
Market value of the self-occupied property
Potential eligibility for traditional refinancing options, such as an FHA construction-to-permanent or 203(k) rehab loan
Because of extensive compliance requirements, background checks, and the greater default risk of owner-occupied loans, most hard money lenders limit themselves to dispensing commercial construction loans.
If you’re carrying out construction activity in Florida, Hard Money Loan (HML) Solutions can assist you with a customized loan package and lending consultancy services. It’s one of the few lending groups willing to offer construction loans for both individual and commercial use.
Source: Tima Miroshnichenko
Go to Hard Money Loan (HML) Solutions for Hard Money Loans for New Construction or Renovation Projects
HML Solutions offers multiple financing options for business entities and individual borrowers carrying out new construction, home renovation, remodeling, and expansion projects. The lending group provides several packages with terms adapted to your construction project—you can opt for:
- Bridge loans
- Cash-out loans
- Refinance loans
- Fix and flip loans
- Owner-occupied housing loans
- Residential construction loans
HML Solutions is a team of experienced investors and entrepreneurs driven by investment quality. They overlook factors like credit ratings and past financial setbacks and structure the loan package around the asset in question. Qualified borrowers can expect some of the most generous terms in the hard money lending industry. Here’s a glimpse of what HML offers:
|Loan Component||HML Solutions Loan Package|
|Principal||$100,000 to $50,000,000+|
|Term||1–3 years (can be extended for qualifying long-term construction projects)|
|Installment type||Interest only (no amortization)|
|LTV offered||Up to 70% of the lower of:|
Purchase price or cost input (as applicable)
|Funding time||3–14 days|
|Origination fee||2 points or 2%|
|Prepayment penalty||No (if repaid after six months)|
Besides construction projects, HML lenders also fund other lucrative business investments, including:
- Short sales
- Business acquisitions
- Acquisitions of foreclosed or REO (real estate-owned properties)
Apply for a construction or another loan at HML Solutions to get a consultation from a veteran lender and expedite the financing process.
Source: Sora Shimazaki
Benefits of HML Construction Loans
Lenders go the extra mile to get you speedy approval (within 3–10 days in most cases) so that you can charge ahead with your project. Other attractive factors of getting a loan from HML include:
- Flexible repayment—HML Solutions adopts a case-by-case approach for each client. Borrowers are typically offered repayment terms according to the predicted cash flow of their operations
- Low paperwork—Forget submissions of endless balance sheets, tax returns, and profit and loss statements. HML lenders only check your basic business framework and permits and documentation related to the construction activity
- No intrusive deposit schedules—At HML Solutions, you don’t have to worry about getting your progress appraised for further fund deposits. The entire sum is released upon approval so that you can invest it as you deem fit
- Transparent dealings—Lenders at HML Solutions communicate every in-house decision that influences you directly, so there’s no delay in your transaction
HML Solutions recommends borrowers have a foolproof repayment strategy and figure out contingency plans in case of cost overruns. The group is open to revision of loan terms if you struggle to complete your payments at any point.
Any Specific Questions? Apply and Talk to a Lender Directly
HML Solutions has a 5-star Google rating for its services. You can check the group’s stellar reviews—they have continuously found ways to fund construction and other investment deals in the most complicated scenarios. Whatever your situation is, talk to an HML lender to get expert borrowing advice.
Here’s how HML Solutions typically services a loan:
- You fill out a short online application form detailing your business and collateral
- An HML member reviews your application and calls you
- You discuss the deal with the lender
- The lender proceeds to conduct property appraisal and basic verification to determine a serviceable LTV ratio (if the project makes sense to them)
- You get a tailored loan package that you can accept or reject
If you accept the package, all that’s left is to wait for the HML team to complete the title work and create closing documents.
Since HML values transparency, they will instantly inform you if your application is rejected. That being said, anyone with high-value collateral and sufficient equity is usually approved.
Source: Andrea Piacquadio
Tips for Navigating Hard Money Commercial Construction Loans
Hard money construction loans help you access funds fast and easily but keep in mind that you’re still dealing with the risk of losing your property if you default. Here are some tips for making prudent financing decisions:
- Be realistic about what you can afford—Make sure you can complete the interest payments for a designated period. Factor in your income or cash inflows and stick to a predetermined budget if necessary
- Study different financing options—Lending terms vary depending on the type of package you seek. For example, if you want to get a regular mortgage later, you may want to consider a short-term solution with no prepayment penalty rather than a long-term one
- Use capable contractors—The right contractors can help you stay on a budget and finish within a set deadline
- Include contingencies in your construction plan—Lenders appreciate it when a borrower’s construction plan includes funds for unexpected costs
- Be careful if you use an interest reserve—Lenders make an interest reserve account out of the principal to fulfill interest payments until the borrower starts generating cash flows. While it’s a convenient option, your final outflow will be much higher, often including added interest on the reserve funds
Reach out to HML Solutions for a consultancy and have a productive discussion about your funding situation.
Featured image source: Mikael Blomkvist