Construction financing, find out how it can work for you?


Financing your construction project can be difficult. You can bet on unexpected surprises, additional costs and problems to arise in every build, no matter how well you plan or how good your building team is. In this article we will discuss private lenders to finance your construction. We will look into the costs, how to apply and the risks and factors you need to take into account before signing.



A construction loan is one of the more risky loans that you will ever need to borrow. Sub traders need to be paid on time, it is always hard to keep to the schedule and as the stress levels rise, accidents can happen. That’s why it is extremely important that your lender needs to understand your situation and have experience in construction financing. It is important the broker understands construction and the risks that are an everyday problem on site.



When it comes to private lenders, one of the biggest risks is the trustworthiness of that lender. Rest assured that there are promising companies out there that specialize in private lending in construction loans. MGB Construction can make this process very easy as we can provide the financing for projects we are building.



When applying for a construction loan, be aware that it is more complicated than applying for an ordinary loan or mortgage from your bank. Generally, you begin a discussion with a company that offers construction loans from private lenders. You will give details about your budget, location, available credit with the suppliers that you have and the cash that you have on hand.



Should you fit the basic mold, don’t worry if you don’t have too much cash on hand, this is normal, you will carry on to fill out an application. Try to fill in as many details as possible, as this all helps with the decision lenders will make about you. The more information you provide, the more faith a person will have in your project and the more likely you are to succeed in winning a loan.



From there, a representative from the company that you have decided to work with will contact a private lender for you. I recommend this approach as these companies and lenders have established years of trust and you have a minimal chance of your private lender falling through and leaving you high and dry. You will have your company representative making recommendations on the loan you are requesting to the lender on your behalf.



Should you have a conditional approval from a lender, a representative will begin to work with you to determine your budget and draws. Expect this to take time because you need this to be as accurate as possible. Your broker will understand that things never do go exactly to plan, but your broker will not allow you to skip over this as you need to ensure that you don’t have any problems further down the road when requesting money.



Before applying, all private lenders will need to be provided with the following information:



·         Building Permit


·         Appraisals (sometimes not necessary)


·         Stamped Drawings


·         Mortgage Application and credit bureau before closing


·         Hard cost construction budget and approved draw requests (to be negotiated and inserted into the commitment).


·         Builder All Risk Insurance policy


·         Site Inspection


·         Resume from the builder


·         Contract with the General Contractor (GC) and GC to be approved by the lender



General costs will vary from lender to lender, so be aware of this if you are choosing to use a private lender to finance your construction rather than a bank or company. A big deposit is not expected, which is great news as many people don’t have that to give, but legal fees are expected to be covered by you, which are generally costing about $2500.00.



A private lender will charge a lender fee of a minimum of 2%. The rates will be approximately 8% to 15%. Depending on your net worth, you may be able to borrow 100% of your construction costs. If your net worth is weak, don’t despair, factors such as location will be taken into account. If your construction takes place in a prime location, this will be in your favor.



Equity can be taken out on property you already own. Equity is essentially using the percentage that you have paid already of your home as collateral against a loan. Say your property costs $300,000 and you have paid $100,000 of it to date. That $100,000 can be used as equity. It is a good idea to use your home equity if you are using it to renovate or completely rebuild your property, adding value to the house in the long run.



It is always going to be a nervous and worrying time when it comes to renovating your property, rebuilding sections or even completely rebuilding the entire property. Generally, a home equity is the biggest investment that most people have. Using this to eventually increase the price of a property will benefit you in the long run.



So when it comes to financing a build, know that you have more options than just going to the bank or trying to remortgage your home in order to make those dreams become a reality. You can look into construction financing with a private lender, using your home equity as collateral.  Construction loans are riskier than other loans and therefore costs reflect this risk. You need to pay your builders and other workers on time in order for a smooth and hassle free situation, you need to pay for materials as they come and have money on hand should a problem arise.



Expect the unexpected when you are building, environmental issues come into play that cannot be accounted for. By using a private lender company, you can be more confident that your financing will not fall through when you need it, the process is simple and you can start making draws within a few weeks after acceptance.