At HML Solutions, we know the importance of construction financing to ensure your development projects do not experience capital hiccups. Many contractors and construction companies believe securing financing is a challenging process, which is correct in specific situations and with certain loan programs. However, the application and approval process can be a breeze with the right lender.
Companies looking for construction loans often make the mistake of seeking conventional loans from traditional institutions. A regular bank must abide by specific regulations that make the loan process more time-consuming and tiresome.
A private lender specializing in construction or hard money loans has more freedom in the application and approval process, meaning it can speed up the process and get your projects funded quickly.
Many people fret over the higher interest rates private lenders charge for short-term loans, but with construction loans, the difference in rates is likely minimal in the long term. Still, because of the rates, we encourage all applicants to have an exit strategy to ensure they pay off the loan before the loan terms exceed their value.
Securing a construction loan is not as challenging as it might seem, especially when going through a private lender like us. Still, there are at least five things to consider to help secure financing for your next project.
1. Determining Loan Affordability
Before applying for a loan, consider the financial commitment if approved. We want to ensure that all our clients receive a fair loan that they can afford. Hard money and other short-term loans naturally come with a higher interest rate, but that rate fluctuates based on the borrower’s qualifications.
You have the power to affect the affordability of a loan. Your credit score, down payment, construction experience, and property value will all play a role in the final details of the loan. An individual with excellent credit, a sizeable down payment, and property clear of debt will receive better terms than an applicant with limited experience and an existing mortgage.
2. Looking Into All Your Financing Options
A short-term loan, 12 to 24 months, is a decent option for residential builders, those looking to build the project, sell it, and move on. However, construction loans with 12 to 24-month terms might not be the best option for construction investors, those looking to hold onto the property as a long-term investment. For such an investor, better options include short-term loans that include opportunities to roll the investment into a mortgage.
We can help you assess your financial options. We offer consulting services. Our team will discuss all your options, going into detail about the products in our portfolio. If necessary, we might be able to customize a financing solution specifically for your project.
3. Understanding the Security of Interest-Carry or Reserve
In some cases, we can add an amount to the loan, called an interest reserve. Essentially, we periodically advance funds to cover interest charges on the loan’s outstanding balance. If necessary and possible, we can extend such a service for the life of a loan, allowing a client to focus on the construction project rather than monthly obligations. The account works similarly to a construction draw account.
The option reduces the risks for the borrower and the lender. Both parties can rest assured that monthly payments will be made for the set period of the interest reserve.
4. Plan for Possible Contingencies
Construction projects often run over budget. To increase your odds of approval, show a prospective lender that you understand the risks by allocating an additional 10% to 15% to cost overruns.
Many lenders, including us, will not charge interest on unused funds, especially if they were not advanced. Keep in mind that it is challenging to secure additional funding once a project is started, so it is better to over budget.
5. Verify the Ability of All Contractors
Many investors will not contribute to the actual construction of a project. You will still need to verify the qualifications of your contractors. As the borrower, you are on the hook for the loan.
Contact Our Team for More Information
Contact HML Solutions today to get the financing you need for your next construction project in the Miami area.