Also called "ground up" loans, these are loans that hard money lenders provide for building an investment property (i.e. not one you'll live in after it's been built). You may notice that much of the content in this guide is similar to our Rehab Loan guide, and that is by design: the loans themselves are very similar, with a few key differences.
One of the biggest misconceptions about hard money is that it is 100% financing. Whilst we have a handful of lenders that will provide 100% financing to very experienced investors on specific projects — and whilst you may be able to find 100% financing from a friendly local investor if you're fortunate — 100% financing is rare and should not be assumed. A lender expects you to have "skin in the game" so that you're committed and aligned with the investment.
The easiest way to find out the exact deal you can get is to apply on our platform. However, as a baseline, you can expect to receive up to 80% of the purchase price, depending on your experience, and up to 100% of the construction costs.
Why "up to"? Every lender has three leverage "ceilings" that they use to cap the risk they're willing to take on each project. Come up against any of these ceilings, and it will max out what you can borrow. Let's dive into each one below.
Loan to Value (LTV)
You're probably already familiar with this term from a mortgage application. It's the maximum a lender is willing to provide on day one of the loan against the purchase price of the land. This figure is 0% for some lenders: they expect you to buy the land upfront but will fund 100% of the build. Others will help you towards the purchase of the land, but many expect the land to have the proper permits in place before funding (else you may need a land bridge loan).
Loan to Cost (LTC)
This is the amount that the lender is willing to provide across the whole project, including land purchase and construction, and the figure typically ranges from 80-85% from lender to lender. For example, suppose the lender is willing to provide 70% LTV and 85% LTC. If the land costs $100,000 to buy with a construction estimate of $200,000, then you will get $70,000 upfront (70% LTV), and you'll be able to get $185,000 of the construction costs, giving a total loan of $255k. ($300,000 * 85% LTC = $255,000.)
Which build costs are eligible? Typically, the lender will only allow the vertical costs of your build.
Loan to After Repair Value (LTARV)
The final ceiling is the amount a lender is willing to provide compared to the property's final value once the build is complete. This ensures you have a profit margin that is high enough to account for the risks of delays, overspending, and market fluctuations. It basically asks the question: How profitable is your deal? Lenders typically set a maximum LTARV of 60-65%, which can be lower for certain assets and locations. (If you're asking why "after repair" value on a construction project, it's because the term originates from rehab loans which hard money lenders are more familiar with!)
From our example, suppose the lender's maximum LTARV is 60%, and the completed value of your property is $500,000. This "ceiling" won't affect the amount you can get because your LTARV is 51%. ($255,000 / $500,000 = 60%.) But if your ARV is only $400,000, your LTARV on the above loan amount would be around 64%, and the lender will need to either reduce the loan amount they're willing to provide — or, in some cases, they may decline to offer.
Regardless, all you need to know is how much you can get for the purchase and how much you can get for the vertical costs. Every lending offer will make that clear, as does our platform.
For a more detailed overview of your costs, head over to our Introductory Guide. The key take-home is that you can expect to pay 11-13% interest and 1-3% in upfront fees, depending on experience. Interest is usually serviced monthly; if it's not, you'll pay a premium (and get less money upfront) for the privilege.
What does this mean in terms of a total cost figure? Again, using our platform is the easiest way to figure this out. We take every offer you receive and automatically estimate your total finance cost for easy comparison and deal analysis.
Dutch Interest
Dutch interest is the most important thing to be wary of when you get a rehab loan. This is where a lender charges you interest on the total balance of the loan, including any undrawn construction funds. In our above example, this would mean you pay interest on a balance of $255,000 from day one, whereas a non-Dutch lender would initially charge you interest on a balance of $70,000, increasing as you draw the construction funds.
Not every lender will specify Dutch (or not) on their term sheet, and not every lender will call it this by name, even if it is on the term sheet, but they all know what it is. That said, Dutch interest is slightly less familiar with construction loans than rehabs. Either way, we require lenders to share whether or not they use Dutch interest on our platform. And to help you, our calculator considers Dutch interest in our cost estimator to clarify things.
By now, you've heard us talk a lot about experience, and that's because it's the single most significant factor in whether you'll get approved and what your terms will be. However, it is only one of several factors. After experience (and deal quality — covered in LTARV above), here are the most important things to consider:
Creditworthiness
A lender wants to know if you'll still be able to repay their loan, even if the proverbial hits the fan on your deal. To do this, they assess your creditworthiness. Most lenders want to know your FICO, how much cash you have to hand, and what assets you own. Unlike with a mortgage — where your application lives or dies by this information — this is more of a common sense check. Many smaller to mid-size lenders are willing to work with borrowers with sub-standard credit, especially if you can put more cash down or provide security on another asset.
However, gone are the days of lending purely based on the asset. Currently, around 70% of lenders on our platform do a hard credit check, whilst the remainder are happy to do a soft search.
Property Ease of Sale
The easier your property is to sell, the more likely it will be approved for a hard money loan. This makes the location and asset type key to your application. Because rural properties are often harder to sell — and harder to accurately price — lenders will either reduce the amount they'll lend or they won't lend at all. Likewise, an infill is much easier to get funding for — and at better terms — than an outlying construction project.
So you've found some land and are ready to start the construction. How fast can you get a hard money loan? Well, with the right lender, very fast! Some lenders specialize in closing in 7 days, though try to allow 30 days from application to close. Generally, the shorter the timeframe, the greater your cost and stress.
With the draws themselves, lenders vary from 24 hours to 7 days to approve each new draw, so make sure to ask what a lender's average turnaround is when timing and cash flow are essential to your project's success.
Get Offers in Minutes
Thankfully, your fastest way to get started is right here on Hardback. Lenders typically offer same-day, if not instantly, so you can be well on your way to finding the lender you need.