Insights

Where Do You Get a Construction Loan?

Construction loans help you build your dream project without having to pay the money up-front. You can re-pay the loan in its entirety as the construction progresses, or convert it to a permanent loan and continue paying in small installments after the construction is complete.

It’s all a matter of finding the right lender to suit your requirements. This can be quite challenging because construction is a very risky project. Lenders are more likely to lose their money on construction loans than on home loans.

There are two options available when it comes to construction loans – bankers and private lenders. Both have their advantages and disadvantages, and the right choice depends on the situation.

Traditional Lenders

Traditional lenders are established institutions like banks. They’re tightly regulated, have a solid lending process in place, and are reliable. Here’s a look at the pros and cons of this traditional system for lending:

Pros of Traditional Lenders

  • Great Interest Rates – Banking is a highly competitive sector, which is why the interest rates can be quite reasonable. This is an important factor to keep in mind because construction loans are high-risk loans, so even the most affordable option will be expensive compared to regular home loan interest rates. When you get a loan from traditional establishments, you benefit from the intense competition in the industry and get attractive rates.
  • Loan Terms – Traditional banking establishments offer good loan terms, even on construction loans. You can extend the loan and change it to permanent after construction is complete. This can decrease the financial burden of the project by a considerable margin.
  • Attractive Down Payment Rates – If you have a good credit score and financial history, it is possible to get a great down payment offer. Banks want to give loans to people who have the ability to pay them back and will provide incentives to draw customers in.

Cons of Traditional Lenders

  • Slow – Commercial real estate investing is a competitive field where timing can mean the difference between great profit and excessive loss. People looking for quick loan approvals won’t find it in the traditional system, even if they have a stellar financial history. It can take weeks or even months to get approval for a construction loan from traditional establishments. This can delay your project significantly.
  • Rigid Structures – Traditional loan structures are rigid and offer very little room for special needs or unique concerns. They are a more generic product that’s designed for the masses. Real estate investing often requires some flexibility in loan structures, but most banks won’t provide tailor-made finance solutions.
  • Qualifying for the Loan – This is one of the biggest problems with traditional lending systems. They have tough qualification standards. They’ll consider your past financial history along with your current credit score before making an offer. Sometimes, even people with good financial histories will be denied a loan because they were considered too risky.

Traditional systems have become wary of lending money for construction projects, especially in the recent years. This has led investors and prospective homeowners to explore other options like private lenders.

Private Lenders

Private lenders offer hard money. They can include investment groups or individual investors who want to fill in the gap between supply and demand of construction loans. Private lenders are trustworthy, and are regulated by the government. Construction LoanMeaning, they must follow established industry laws. Here’s a look at some of the pros and cons of choosing this alternative:

Pros of Private Lenders

  • Funds are Approved Quickly – Private lenders will assess your application and approve it within 3 to 5 working days. Some lenders might even complete the entire process within 1 to 2 days. This is very advantageous for real estate investors who want to complete the projects quickly and gain profit.
  • Better Assessment – These lenders don’t solely provide approval based on your financial history or credit score. They look into additional factors like down payment, equity on the property, property size, and the borrower’s exit strategy. This makes loan approval easier and simpler.
  • Flexible Structure – This is one of the biggest advantages of borrowing from a private lender. Unlike banks, they can tailor the loan structure according to your requirements. Also, they can alter the repayment schedule based on your requirements. A more flexible structure allows commercial real estate investors to utilize their money better and focus on the project.

Cons of Private Lenders

  • High Interest – Private lenders can charge a substantial amount of interest for their services. Depending on the type of loan and the arrangement between lender and borrower the range can vary. They also apply an origination fee, which can increase the overall cost of the loan as well.
  • Shorter Terms – Often times, you need to pay back the loan in quicker than you would to a bank. Construction loans with shorter terms can be more expensive with higher interest rates.
  • Down Payment Rates – Some private lenders require a larger down payment than those provided by traditional banks. This is the biggest disadvantage of choosing hard money lenders for your project. Many investors are forced to dip into their own savings or borrow money from somewhere else to make this down payment.

Choosing between these two options can be challenging. You can create a list of priorities for your project to understand which lender will be most suitable for it. Many real estate investors have started to approach private lenders first instead of considering them a last resort. Some prefer traditional lenders and are more comfortable with the system. It’s all a matter of preference.

About Mid-Atlantic Financial Group

To learn more about Mid-Atlantic Financial Group, visit https://mafgllc.com/ and explore our website. We look forward to hearing from you!

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Mid-Atlantic Financial Group

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Pikesville, MD 21208

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