Financing Your Major Construction Project: What to Do When Traditional Banks Say No
Undertaking a major construction project is an exciting but daunting endeavor. Securing financing is often one of the biggest hurdles, especially when traditional banks and lines of credit are not an option. If your bank has turned you down, don’t lose hope—there are specialized construction mortgage lending companies that can help you move forward. When clients work with me, we use the following step-by-step guide to navigating this process and securing the funds you need.
Step 1: Put Together a Detailed Construction Budget
The foundation of any successful construction loan application is a comprehensive and realistic budget. Your budget should clearly outline all costs associated with the project. To get started, download and use this construction budget template to organize your expenses.
When preparing your budget, it’s critical to distinguish between hard costs and soft costs:
Hard Costs: These are the direct expenses related to physical construction, such as framing, plumbing, electrical work, roofing, and materials. Lenders typically focus on these costs when determining loan amounts.
Soft Costs: These include indirect expenses like architectural drawings, permits, development fees, and legal costs. Be aware that most construction lenders will not include soft costs in their loan calculations, so you’ll need to account for these separately.
A well-prepared budget demonstrates to lenders that you’ve done your homework and understand the scope of your project. It also helps you anticipate cash flow needs and avoid surprises down the road.
Step 2: Seek Out Specialized Construction Lenders
Unlike traditional banks, companies that specialize in construction loans are accustomed to the unique risks and requirements of construction projects. These lenders typically offer loans based on the as-complete value of the project—meaning the estimated value of the property once construction is finished. Most will lend up to 60% of this as-complete value, ensuring they have a buffer to protect their investment.
I work with several lenders that focus on construction financing and I am experienced in this niche. Be prepared to provide detailed documentation, including your construction budget, project timeline, and plans, to demonstrate the viability of your project.
Step 3: Understand the Cost-to-Complete System
Construction loans operate differently from traditional mortgages. Most lenders use a cost-to-complete system, which means funds are disbursed in stages, or draws, based on the progress of the work. Here’s how it typically works:
You complete a portion of the construction (e.g., foundation, framing, or plumbing).
The lender sends an inspector to assess the completed work and verify that it aligns with the project plan.
Once approved, the lender releases a draw to cover the costs of the completed work, allowing you to pay contractors and move to the next phase.
This draw system ensures that funds are allocated responsibly and that the project stays on track. However, it also means you’ll need to have some liquidity upfront to cover initial costs before the first draw is released.
Step 4: Plan for Soft Costs and Contingencies
Since most construction lenders focus on hard costs, you’ll need to secure alternative funding for soft costs. This could involve personal savings, investor contributions, or a separate line of credit. Additionally, include a contingency fund in your budget (typically 10-20% of the total project cost) to cover unexpected expenses like material price increases or delays.
Step 5: Work with Professionals
Navigating construction financing can be complex, I am one of the professionals you need as well as others, such as:
General Contractors: A reputable contractor can provide accurate cost estimates and ensure the project stays on schedule.
Accountants or Financial Advisors: They can help you structure your budget and manage cash flow.
Final Thoughts
Securing financing for a major construction project when traditional banks say no is challenging but far from impossible. By partnering with specialized construction mortgage lending companies, preparing a detailed budget, and understanding the cost-to-complete draw system, you can position your project for success. Start by downloading this construction budget template to organize your costs, and book a time with me to discuss your project in detail. With the right planning and partners, your vision can become a reality.
