You know that you have two primary sources of funds for construction. That is if you choose to leave your own cash in the bank and leverage someone else’s. If the property is in good shape and needs little in the form of improvements, there really needs to be no choice.

You choose a conventional loan. private vs. conventional lendingIf there are other issues with the property, a private lender can come into play. What do both look for?

A traditional investor loan is used to replace an existing construction note once the building has been certified as completed and ready for occupancy. The permanent mortgage will need at least 20 percent in equity which is most likely found in the lot upon which your structure rests. If not, then be prepared to provide bank statements showing you have enough to cover the equity position as well as funds required for closing costs. You will also need to prove that you can afford the new monthly payments using tax returns, pay check stubs and W2 forms. Insurance and a good credit score will also be needed.

What does the private lender look for? A private lender can look for anything the lender desires as long as the guidelines are applied to everyone. A private lender can look less for a credit score and the ability to repay and rely solely on whatever the applicant puts on the application, a so-called “stated” loan. This isn’t to imply that private lending equates to loans with unverified information it’s simply the private lender can make its own call.

The private lender’s primary focus is, “Will I get paid back and if so, how?” Private lenders look for an exit strategy and if the applicant can clearly show how the loan will be paid back, as long as the lender is convinced, much of the traditional documentation won’t be needed in order to be approved for the loan. Private lenders are for short term transactions only as rates and fees will be higher, but they are often a convenient, necessary alternative.