The Benefits of Using Private Lenders for Construction Loans

Private Lenders have not always been the financier of choice for real estate investors focused on ground-up multifamily construction projects. Despite having less stringent requirements than regional and conventional banks, private lenders for construction loans have historically been considered a secondary alternative.

However, that has changed significantly over the past few years with private money lenders becoming the preferred funding source for many real estate investors that focus on ground-up multifamily construction projects.

Aside from being a reliable and trusted source of financing, the popularity of private lending is increasing for several other reasons.

A Fast and Streamlined Approval Process

While regional and conventional banks can take months to approve and close on your ground-up multifamily construction loan, private lenders can typically close within two to four weeks. This is predominantly due to the lax requirements regarding tax returns and debt-to-income ratios—neither of which are necessary for approval.

In fact, most private lenders will only request the following information:

  • Credit Check: While your credit doesn’t have to be perfect, private lenders are looking for a credit score above 670.
  • Experience Verification: For multifamily loans, most private lenders will require proof that the borrower and/or the general contractor has completed at least three ground-up multifamily deals within the last three years. Some lenders might even consider ground-up construction or single-family deals in the experience verification.
  • Liquidity Verification: Usually, private lenders will require that you put 15% to 20% down and will verify that you have enough cash reserves in your bank account to cover 6 months’ worth of interest payments plus the loan’s closing cost. Private lenders might also consider your current bank balance, 50% of an IRA balance, and/or 100% available HELOC balance on a primary residence towards this liquidity.
  • Approved Plans: Oftentimes, private lenders will require a copy of the project’s approved plans before approving the ground-up multifamily construction loan.
  • Third-Party Reports: Private lenders usually require an appraisal from a national brokerage firm that verifies the “as-is” value and the “after-repair” value. Typically, the “as-is” value needs to be close to your purchase price to qualify as equity. If the property has been owned for 2 or more years, a private lender for construction loans will generally count the appreciation towards your “as-is value.” Private lenders will also want to ensure that the loan does not exceed 65% of the estimated “after-repair” value in the appraisal.
  • Budget Feasibility Report: Private lenders will also ask for a Budget Feasibility Report which requires the Borrower to provide a detailed construction budget to a third-party firm selected by the private lender. The third-party firm will then verify that the borrower’s construction budget is adequate to complete the project.

Private Lenders for Construction Loans Have Fewer Bureaucratic Hurdles

Obtaining a multifamily construction loan from a conventional or regional bank is often accompanied by numerous bureaucratic hurdles. These processes can pose significant challenges for real estate investors seeking timely and efficient financing. Opting for a private multifamily construction loan can help bypass many of these challenges. These bureaucratic hoops often come with mountains of paperwork and extremely rigorous underwriting requirements. While private lenders still require a credit check and the applicable documentation, it’s nowhere near what’s required by a conventional or regional bank.

Higher Leverage and Flexible Loan Terms

While regional banks can require a 40-50% down payment, private lenders for construction loans have more flexibility with their down payment requirements. They also offer better flexibility on the terms of the loan which is based on the project’s merit and the overall track record of the real estate investor.

Merchants Mortgage and Trust currently offers experienced borrowers 80% loan-to-cost (LTC) for a ground-up multifamily construction loan and can go up to 85% LTC with an Interest Reserve financed into the loan for up to 24 to 36 months. Rates generally start at 10% with points starting at 1.25.

Tailoring to Specific Project Needs

Another benefit of using a private lender for construction loans is their extensive industry knowledge and diverse areas of expertise. A reputable private lender will be well-versed regarding the unique challenges and opportunities associated with multifamily ground-up construction projects. Many private lenders can design custom loans to fit many different loan scenarios. MMTC offers a no-obligation, quick loan proposal program for this purpose.

Openness to Higher-Risk Projects

Private lenders often have a higher risk tolerance than conventional or regional banks. This doesn’t mean they’re reckless or naive, but rather the opposite. Their extensive experience allows them to see the bigger picture and the overall benefits of the deal. This foresight coupled with a private lender’s adaptability enables them to fund more innovative or unconventional projects that regional banks might not consider—ultimately empowering the borrower to consider a broader range of multifamily ground-up projects.

Is Private Lending the “New Norm” for Multifamily Construction Loans?

The shift from regional banks to private lenders in the multifamily construction arena is emblematic of a broader change that is occurring in the real estate financial market.

Over the past few years, tightened regulations on traditional banking institutions catalyzed the rise of private lending, positioning them as a more adaptable and responsive alternative for real estate investors.

As this article has explained, private lenders offer an array of advantages, from swifter approval processes to flexible loan terms tailored to a project’s unique needs.

Private lending’s ability to circumvent the often-cumbersome bureaucracy associated with traditional banks, combined with their flexibility and understanding of the multifamily construction niche, makes them an increasingly attractive option for real estate investors seeking a private multifamily construction loan.

The economic landscape is ever-evolving, and as regional and conventional banks grapple with their own set of challenges, real estate investors in the ground-up multifamily space must remain agile. Private lenders have continued to be a shining example of adaptability, ready to finance ground-up multifamily projects that fit the changing contours of the real estate industry.

For real estate investors navigating the realm of multifamily construction financing, the rise of private lenders for construction loans presents not just an alternative, but a future full of opportunities.

Since 1961, Merchants Mortgage and Trust has been the private lender of choice for real estate developers across the United States. If you are interested in learning more about our competitive financing options and would like a no-obligation quote, contact us today!

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