How to Qualify for a Spec Construction Loan

First-time real estate investors could find spec construction loans a challenge to qualify for and very complicated. Get a sense for how construction loans are different from conventional mortgages and some strategies to maximize your chance of qualifying.

Construction loans differ from ordinary commercial loans in a variety of ways. They are more complicated than regular mortgages and funding is given according to a specific timetable. An initial amount of funding will be given to the borrower, and then the remainder of the loan will be dispersed on a monthly basis, or at the borrower's request. Most lenders will require verification of a borrower's expenses over the course of a construction project, which can create complications.

Construction loans are especially tricky to qualify for and are considered too risky by most banks. Most lenders have difficulty underwriting construction loans because they have to rely on the borrower's assumptions about the cost and profitability of a given project. Most lenders are especially wary of spec loans and consider them too risky because there is no guarantee of a future sale.

A spec loan is usually given on a short-term basis and is not meant to be a long-term mortgage. The aim of the borrower is to sell the property quickly after construction is completed. It is crucial that potential borrowers can demonstrate their expertise in order to qualify for a spec loan.

If you can talk up your expertise to increase your chances of qualifying for a spec construction loan

Your financial projections are what a spec lender will rely on to underwrite your loan and so it is essential to demonstrate your expertise. If a lender doesn't have faith that you will finish a project, or that you will earn a profit in the end, in most cases your construction loan won't be approved.

The best way to qualify for a spec loan is to give any potential lender confidence in your knowledge and experience when it comes to real estate. But there are additional strategies you can employ as well.

Specific tactics to help you qualify for a spec construction loan

Seek out lenders located near your construction site. A local lender will have an emotional investment in the area and will have a better understanding of your project's potential. Ensure you have enough capital up-front to make a sufficient down payment. Lenders will want an assurance that you have a sufficient stake in your construction project. The risk entailed by a spec loan usually entails a significant down payment.

Have a detailed understanding of your builders draw-process, meaning know how much your builder intends to spend at every step of your project and be sure this schedule matches the structure of your loan.

In short to qualify for a spec loan, demonstrate your expertise, find local lenders, have sufficient cash on hand and know your projects timetable. By employing these strategies, you maximize the chances of your spec loan getting approved.

Dennis Dahlberg
Broker/RI/CEO/MLO
Level 4 Funding LLC  Private Hard Money Lender
Arizona Tel:  (623) 582-4444
Dennis@level4funding.com NMLS 1057378 | AZMB 0923961 | MLO 1057378
22601 N 19th Ave Suite 112 | Phoenix | AZ | 85027
111 Congress Ave |Austin | Texas | 78701

The Difference Between a Mortgage Banker and a Mortgage Broker

The Difference between a Mortgage Banker and a Mortgage Broker

One of the questions I am most frequently asked is where do I get a mortgage?  Well, there are two primary channels that a consumer can obtain a mortgage loan – mortgage banks and mortgage brokers.  Each of these groups have their own distinct advantages and disadvantages.

Mortgage Banks: 

Generally, when people in the industry refer to mortgage banks, they are often talking about large retail banks such as Bank of America, Wells Fargo, Washington Mutual, etc.  What makes these companies mortgage banks is that they lend their own money for mortgage loans.  In other words, when you get a loan at Bank of America, they are actually writing the check at the closing.

Mortgage Brokers: 

Mortgage brokers are middlemen who put home buyers and mortgage banks together.  In other words, mortgage brokers do not actually lend their own money, but coordinate obtaining funds for you among the many different mortgage banks.  Most mortgage brokers are small Mom & Pop business that is usually not known outside of their local markets.  However, there has been a lot of consolidation in the industry and there are some large brokerages that are gaining in brand recognition.

Personally, I favor mortgage brokers because on average they tend to be more competitive.  Mortgage brokers do not have an allegiance to one particular bank and have the ability to find the best deals for their clients.  When dealing with a mortgage bank, all you have access to is that particular bank’s mortgage products and rates, which may or may not be competitive for your situation.  Additionally, if you need a niche loan product or have credit issues, you are definitely better off with a broker.  I also believe that the best loan officers tend to work for brokerages.  Many banks use low paid call center workers and telemarketers to work as loan officers.  Also, many loan officers work at banks early in their careers to get training and switch to brokerages where they can earn more money once they have built a sustainable client base.

Many people falsely believe that they can save money by going to mortgage banks directly instead of through a Arizona Mortgage Broker. What they fail to realize is that mortgage brokers obtain WHOLESALE interest rates from mortgage banks.  The rates that a broker gets from Wells Fargo or any other retail bank are substantially different than the rates that would be offered if you went to that bank directly.  The reason is that it is cheaper for a mortgage bank to offer their products to brokers at a discount and allow the brokers to add in their profit accordingly rather than to try to hire, train, and manage their own sales force.  Simply put, mortgage brokers are like an outsourced sales force for mortgage banks.  The general market agrees with my assessment as about 60% or so of mortgage loans are originated through brokers.

Mortgage banks do have their strengths.  First, many people prefer to deal with recognizable brand names.  Second, because they are making the lending decision, they can be more efficient in some cases.  Need a loan closed in a week?  You might have a problem getting it done through a traditional mortgage broker.

The downside to mortgage brokers is that there tends to be a “used car salesman” component to the business.  A few bad apples spoil it for the true professionals.  With very little regulation and ridiculously low barriers to entry, mortgage brokerages can also attract some shady characters.  As a result, it is important that consumers make sure they are dealing with a reputable mortgage brokerage and loan officer.  Again, it isn’t about the interest rate quote, but the person you are dealing with.

Regardless if you choose a mortgage bank or a mortgage broker to handle your deal, it is important to check references, rates, and fees to ensure you are receiving a competitive offer.

Big Daddy Dennis Hard Money Lender

Arizona Hard Money

Arizona Mortgage Broker

Level 4 Funding LLC

23335 N 18th Drive Suite 120

Phoenix AZ 85027

623-582-4444