Its not all that uncommon for many property owners, developers, and builders to actually prefer a private construction loan over what they could qualify for at a bank or institutional lending organization.
On the surface, that might not seem to make any sense as the cost of financing at a bank or institutional lender is going to be lower than what a private mortgage lender will be offering, right?
The answer to that is yes and no.
On the surface, or at the outset, the posted interest rate on a construction loan from a bank is likely going to be cheaper or lower than from a private mortgage lender on a similar deal.
But its also not uncommon that the complex requirements of a bank or institutional construction mortgage can cause the borrower to incur other costs during the project that, when factored into the effective financing rate, can sometime make the bank a more expensive option in the end.
Which leads us to the key reasons why a private construction loan can be more popular with certain borrowers, especially those that have at least one construction project under their belt, or are in the construction business for a living.
The key with any construction project is accurately budgeted cash flow and a timeline to completion that is closely followed so that everything gets done on schedule and no significant if any incremental costs are incurred.
From a predictability of approval and funding point of view, private construction loans tend to get approved faster and their draw advance process much easier to comply with in terms of when the draws will occur, how they will be administered, and the probability of getting all the budgeted or required funds advanced on schedule.
There is certainly a higher cost of funds for this type of financing, but the added benefits are worth it for many borrowers.
Private construction loans are also common in a bridge financing sense in situations where a bank construction loan is not providing full advances or the borrower is not able to meet the banks requirements in some form, causing the project to stall out unless another source of capital is acquired quickly.
So whether you use a private construction loan as a primary source of construction financing or a bridge loan to complete a project that already has a construction mortgage facility in place, private mortgage construction loans may very well be your first and best choice for construction financing.