New Construction Loan vs. HML, which to use?

Question

Let’s say that I am looking for a distressed property to rehab and rent out. What are the tradeoffs to using a new construction loan versus a hard money lender? Are there certain aspects of the property that would only qualify it for one versus the other?

From what I have researched, new construction loans have much lower interest rates (5-6% vs 12%+ for HML). So I am trying to figure out what would make hard money lenders more attractive in this case. Does the condition of the property determine which type of loan is available?

Scott D Burrows · Answer

@Jeremy Mims

The tradeoffs would be just that, looking at your case externally.

However, I assume that there are more legal parts to this question than I would be able to answer and I won't try to answer your question.

On the face of it, 5% is better than 13%. However, hard money loans generally are done by private individuals and definitely very fluid or flexible to what you need to do on a flip.

Also, a homestyle loan (rates in the 4-6%) would also work for a distressed property, as it includes repairs and home cost into the total loan amount. Recommend you ask @Diana Muresan as I have worked with her and recommend.

When you are saying new construction loans, do you mean conventional loans?

If so, the tradeoffs would be a longer time to wait for closing, etc. Hard money would be a more seamless process, while still does require appraisal etc. However, a lot less middlemen involved with hard-money lending. If you are tempted to go the hard money route, give a call to a friend of mine at RCD Capital, Jonathan Surak. They have flip loans and landlord loans (8% interest only, which will come out to roughly the same payment as a conventional with principle pay-down (private so they don't count towards your property limit with conventional mortgages).

Anyways, good luck and hope I didn't confuse you more.

Summary:

• New construction or conventional Better interest rateSlower time to process and close 
• Better interest rate
• Slower time to process and close 
• Hard money A little quickerMore expensive
• A little quicker
• More expensive

• Better interest rate
• Slower time to process and close

• A little quicker
• More expensive

Sincerely,

Scott

Jeremy Mims · Answer

Thank you both for your comments!

So it appears that the flexibility/quickness of HML are why one would select that route...

I did some more digging on the Construction Loans, and it looks like they take longer to qualify for as they require finer details regarding the rehab work required for the project. (https://www.investopedia.com/terms/c/construction-...).

Andrew Bang · Answer

A true asset based hard money lender will only look at the property to determine whether to lend on it or not.   They won't pull your credit or look at your income/taxes.

A HML can also provide the rehab costs.  If you can find a property with a high ARV, the HML will lend up to a percentage (ex. 85%) of purchase price and rehab costs.   You can close quickly and start renovating the property, put a renter in it and refinance the whole amount into a long term low interest friendly loan.

Each HML is different, if they loan money from a fund, closer to a private money lender, they can be more flexible on terms, fees, and the process of getting a home approved.   Some do their own property valuations and don't require an appraisal saving you money and time.