The investment in a new building requires careful planning and access to a high level of capital. Several funding options are available for this type of loan. Two common options include a bridge loan and a construction loan. Both have different purposes and benefits. Those considering these loans should think about the length of the project. Hard money lenders provide access to both options.
What Are Construction Loans From Private Lenders?
The goal of construction loans is to provide capital for the construction of a building. This includes small commercial, apartments, and single-family homes. Generally, these loans are designed to provide capital right away to fund the building process.
They do not remain on the property after the completion of the build. Typically, the property owner secures a home loan to cover this cost or another type of property loan.
These loans are available only after a construction timetable and a full detailed plan of the process is complete. There will always be the need to provide a detailed budget that outlines what the funds will be used for. It should include all aspects of the cost to construct the building. This includes all building materials, all appliances, all finishing, and all fixtures. It should also include labor costs.
There are a few things to know about this type of loan:
- They generally remain in place for a year or less.
- Some hard money construction loans can cover some of the lot purchase prices. Generally, the lot lien must be in hand prior to the construction loan’s funding.
- There is a down payment requirement in most cases. This loan to value amount depends on the individual circumstances of the loan as well as the lender’s preference.
- The fees and interest rates on these loans vary per project. However, they are typically competitive.
Keeping this in mind, other solutions are available. For example, for an owner-occupied loan on a new home, it may be possible to obtain new construction loans without any down payment. This is not always available, though some private lenders offer it.
What Are Bridge Loans from Private Lenders?
A bridge loan is a bit different but still offers the same qualifications and availability. The major difference here is that a bridge loan is very short term. They work to cover the gap that occurs between the time that the property buyer needs to make a purchase of the property and the time work on the property is complete.
For example, a bridge loan can help to provide more flexibility so that a tenant or a home buyer can be found. It allows for time for builders to make the required repairs and renovations necessary. This is short-term financing. There are a few things to keep in mind.
- Bridge loans are typically beneficial only for short periods of time under a few months.
- They are available as both commercial loans and residential loans.
- Most often, these loans have slightly higher interest rates than construction loans. However, they are rather easy to obtain for well-designed projects.
Hard money loans for these needs can be readily available often sooner than traditional loans. Additionally, other types of construction loans are available to meet specific goals. This includes residential rehab loans, fix and flip loans, distressed property loans, and cash-out refinances.
Generally, borrowers need to work closely with private loan lenders to ensure they have a clear plan forward in both options. Borrowers must be able to show them what the end goal is and how the home will be sold or how another loan will be obtained to repay these existing short-term options.