The driving force behind many new homes and commercial premises is the all-important construction loan.
For decades now, developers have been using construction loans to fund their projects, cover essential costs, and then make a profit.
Compared to conventional financing from banks, construction loans are a little different. They come from private lenders – not banks.
The reason why thousands of developers have started turning to construction loans is that they’re much easier to get. There’s less hassle involved and the construction loans can (in some cases) be obtained within a matter of weeks. Plus, construction loans can cover up to 100 percent of the total costs, which is impressive, to say the least.
With that said, you’re likely interested to learn about the process behind getting a construction loan. If this is the case, you’ve come to the right place. Below, you can read about the important steps behind getting a construction loan if you’re a first-time developer looking to get off the ground and make some big moves within the industry.
Firstly, Find a Private Lender
In today’s industry, you can get loans for construction projects from a variety of different private lenders. Typically, the lender you choose will be based around:
- The length of your project
- How quickly they can provide the loan
- Interest rates
As a first-time developer, it’s a good idea to communicate closely with them to see what can be offered. You might find that some private lenders turn you down based on the “risk” of the project. In other words, they aren’t confident that you can develop the property and then sell it for a profit. However, you should find that lower-risk projects get greenlit much more easily. Then, as you become more experienced in the industry, you won’t have to worry about getting rejected in the future.
Tip: it’s worth mentioning that you can do a joint venture with an experienced developer to secure and guarantee the funding.
Provide a Detailed Construction Plan
Naturally, one of the first things that the private lender will ask to see is your construction plan. This will outline key factors, such as activities, scheduling, resources, and budget. Providing that your construction plan is efficient and clear, there’s a strong chance that it’ll get approved.
Have a Good Credit Score
The vast majority of private lenders will also want to see your credit score before providing you with a construction loan. The reason for this is because of the above-mentioned “risk” factor.
In some cases, construction loans can be risky. This is why you can expect most lenders to require a credit score of around 680 or higher. Without this, you’ll struggle to get a proper construction loan.
On top of this, it’s also likely that the lender will ask to see your financial history (e.g., annual income). Again, this is for safety net purposes, as they don’t want to provide construction loans to individuals with bad financial histories.
Be Able to Afford a Sizeable Down Payment
Depending on the loan you’re requesting, you might be asked to put down a sizeable down payment (e.g., 20 percent). Usually, the bigger the down payment, the more likely you are to be accepted. This is why it’s good to always have funds onboard so that you can cover down payments.
