Alternative Lending for Construction Loans
By: Kimberly Hoffman
The lending landscape has dramatically changed in the past four years, and traditional banking lenders have gone from full speed ahead to full stop on speculative construction loans and construction-to-permanent loans to builders. Neither of these extremes is practical nor sustainable, but savvy mortgage brokers can set themselves apart in the coming years and help their clients secure new construction loans with hard money lenders.
Although, traditional lenders’ appetite for this type of product fluctuates with the market, private money has long provided construction loans and continues to do so. Private-money lenders are understandably cautious with new construction loans, as many project future downward momentum on home values. These lenders also are sceptical of the effect of shadow foreclosure inventory that competes with new homes and is available for .50 cents to .60 cents on the dollar. Although, banks generally stay away from new construction loans, private lenders are still are willing to fund some projects, if they meet their lending requirements.
There are 5 key things brokers must keep in mind when seeking new construction loans from hard-money lenders:
- Location – Be sure your lender is comfortable with your project’s geographic location. Typically, a private lender will only underwrite new construction loans if it can actually kick the dirt.
The process: Acquaint yourself with the builder’s draw process. Individual private lenders can be more liberal and pay directly after a site inspection.
- Lot lien – Know whether your private lender is comfortable with including some or all of the lot cost in the construction loan. Ideally, a private money lender wants a lot to be free and clear to the first-position private-money deed of trust. Some private lenders may fund as much as 70% loan-to-value of the appraised value.
- Down payment requirements – Ask about the requirements for how much of the borrower’s own money must be in the project. The private lender will require a up to a 30 percent nonrefundable deposit, which can be rolled into the takeout loan.
- Rates and fees- Be able to speak in their terms about rates and fees. For example, the typical builder who previously used bank financing may squawk at a 6 month construction loan with a 12 % interest rate and 4 points, but you must show profits they can make on construction loans.