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Private California Construction Loan or Bank Loan: Which Type of Financing is Best

Woman Getting a Private California Construction Loan

Financing your construction project is one of the most important steps you’ll take before reaching the finish line. Unfortunately, it’s also the one step many people spend the least time researching. Take a few minutes to consider your options before heading to the nearest lender, and you could save yourself time and money.

When choosing a construction loan, you have three basic options: Self-funded (you already have the cash on hand), funding through a bank, and private funding. For this post, we’ll focus on bank funding and private funding.

There is no right or wrong decision, but there are pros and cons for each option. You should consider both types of construction loans and decide which works best for your situation. At RMC Funding, we can help you find the best California construction option for your project. Don’t hesitate to call with any questions.


Funding your California Construction Project with Bank Money

Bank Loans

Bank Loans often have more stringent lending requirements compared to private loans.

When people think about financing any project, they usually think of bank funding. Bank funding is popular among experienced builders because the loans are always cheaper. Banks can offer prime rates, which saves the borrower money over the life of their loan. However, bank loans are also more difficult to get. A bank requires more documentation than private funding, and the borrower will undergo stringent reviews (including credit rating and estimates of future earnings on the construction project.)

Banks will factor in debt to income ratio, credit history, bankruptcies, and potential profit (mainly if you are building a business), before deciding if they want to lend you money. It is a time-consuming process. If you don’t qualify for a bank loan, you might waste time.

However, if you have excellent credit, you could save several thousand dollars going this route, so keep this as an option if you are confident that this type of loan works for you.

Another consideration: Most banks don’t loan to builder-owners. So, you may not even be able to apply for funding through traditional means.

Private California Construction Loans

Private California Construction Loans

Private California Construction Loans have more lenient requirements but often cost more than typical bank construction loans.

Private California construction loans are more expensive than funds from a financial institution. While this can be a turnoff for many builders, private California construction loans offer the benefit of less stringent requirements. Most private lenders don’t care much about your debt to income ratio. Most private lenders are also more forgiving of bankruptcy and poor credit, though you’ll pay for the convenience and leniency.

Lenders of private California construction loans depend on investors for money to fund loans. Their investors want good returns on the capital they offer. Private lenders charge more for their investments to help cover those costs on top of other operating expenses. Banks have easy access to funds (through the government and customer money). Because banks pay smaller returns on checking and savings accounts, they are able to offer more attractive rates to their borrowers.

Some builders prefer private funding because they don’t have to deal with the hassle of working with a bank. If your construction project only lasts a few months, the additional cost could be worth the time saved.

No matter whether you choose to fund your construction project with private or institutional money, there are a few things you should know:

  • Does the loan have any penalties for paying it off early? (Private loans do not, and most bank loans won’t either, but some do, so you should ask).
  • What is the LTC, loan-to-cost, required for your loan? (Cash or equity you provide when getting the loan. Usually around 20 to 25 percent). Click here to learn about construction loan equity requirements.
  • Do you operate on a draw disbursement system or voucher system? (The draw disbursement lets the borrower pay out expenses as needed, whereas vouchers pay vendors at certain predetermined milestones).
  • What type of information do I need to provide for loan qualification?

If you’re stuck, asking potential lenders these questions can help you identify with whom you’d feel most comfortable working. Choosing a type of California construction loan isn’t black and white. You’ll need to look at the numbers, and reason through your situation to decide which option fits your needs best.

RMC Funding has been helping customers since 1984. We know that each client has unique needs and we help them find financing that fits their circumstance. Our goal is to help our clients make a sound economic decision so that they can be successful. Whether you’re interested in a California private loan or need help securing a loan through a financial institution, we can help you prepare. If you have any questions or want to see if you’re ready for the next step in funding your project, call us today at 1-800-649-5626.

Model Home Under Construction

Money Matters: Applying for a California Construction Loan

The time has arrived. You’re looking for a California construction loan to move your project forward. Whether you’re building a home or building a business, erecting a structure can be costly. Unless you’re sitting on a pot of gold, you’ll likely need some financing to get the construction part of your plan off the ground.

A development project can be exciting. Constructing a commercial building or a home is a visual reward for all the planning you have already done. The excitement is enough that people often jump the gun when it comes to applying for financing. At RMC we want to make sure your project is a success, so we’ve provided a few things to think about. Before applying for a construction loan in California, here are a few things you need to know.

Start Date for a California Construction Loan

Make Sure You Have a Start Date in Mind

You Should Have a Start Date in Mind

Before you apply for a building loan, you’ll need to have proof that your project is moving forward. Typically, this includes already having the property on which you plan to build, plans for your structure, and permits to build. You can start the application process while you are in the process of getting your permits approved, we need to ensure that you are past some major hurdles in the planning process. We look for shovel-ready projects because most construction takes a year or two from conception to the start of construction.

Getting the Right Type of Financing

You can get a construction loan through one of two types of financing. The first type is institutional loans. Institutional loans are your traditional loans through an institutional lender, like a bank or a credit union. The other option is via private lenders. Private lenders use their own money to fund construction loans and may have different rules than a bank.

There are pros and cons to opting for a loan from either source. While bank rates may be cheaper than private loans, they also charge additional fees you may not find with a private lender. On the other hand, banks may have stricter requirements for approving a loan versus a private lender. All California construction loans have conditions for your down payment RMC Funding can help you determine which option works best for your situation.


Do You Have Enough Skin in the Game?

Do You Have 20-25% Down for a California Construction Loan?

Do You Have Enough Skin in the Game?

Before applying for a construction loan, you’ll need to have close to a 20 percent down payment for residential construction and 25 percent for commercial. If you don’t have money for a down payment, a lender likely won’t approve you for a loan. The money you paid for the land or the money you spent on plans and permits can count as down payment money.

Lenders must consider the value of their investment. With traditional home or business loans, your lender can look at the value of the building and previous business revenue. However, when you are building a house or a commercial property from the ground up, the lender has less information with which to work.

When building on land without a structure or previous business, lenders may have to factor in other considerations. Your lender may look at nearby businesses or other businesses within your same industry and use their numbers to determine if there is a potential for profit. If you are building a residential home on the property, you’ll need to provide information about the material you’ll use, the size of the house, and the contractors/subcontractors who will complete the work. These details allow your lender to make an educated decision about lending you money for your endeavor.

If you aren’t quite at the 20 to 25 percent mark with your down payment, or you’re permits aren’t quite ready, RMC Funding can still pre-approve you, if you meet certain conditions. So, don’t hesitate to call and talk to us. If you are just shy of the required down payment, we may be able to move forward with the loan process. We can also consult with you and determine whether we have sufficient information to move forward with your loan application. We can also provide advice as to any additional things you may need to complete before we finance your project.

At RMC Funding, we are committed to help our clients’ projects succeed. This is how we succeed too. Call us at 800-649-5626 today or click here to send us your details to learn more about your California construction loan options.

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