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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.