Many people do not understand why home construction loans are more difficult to get than standard mortgage loans. Lenders consider them "story loans", meaning simply that there is a tale that leads up to the building plan. One common story is that the borrower is hoping to improve the value of his property. Another is that an investor has purchased a property and plans to resell it for a profit.

If you are the prospective borrower, you must be willing to share your stories and your plans, before you can get home construction loans. Your plan may not fit into the guidelines of standard mortgage providers like Freddie Mac and Fannie Mae. It may not fit the guidelines followed by the majority of commercial bankers. This is especially true if you never plan to actually live in the home. That is, if you are building or upgrading a home simply for investment purposes.

So, you may need to look into unconventional sources for home construction loans. Private lenders are becoming an increasingly popular source. The loans that they offer are sometimes referred to as hard money loans. Some people call them "hard-luck" loans, because they think of them as the last resort for someone with credit problems. The truth is that the majority of private loans go to rehabbers.

A private lender will still want to know your story and that you have a good plan. You will need to have some experience and some capital of your own, but they will often approve a loan that a commercial bank would deny. They can provide funding for purchasing and rehab construction loans. If the difference between the after improvement value and the purchase price is good, they can even roll in the closing costs. In any case, the closing costs on private construction loans are lower than the closing costs on a conventional loan.

One of the biggest advantages for a rehabber is that closing is faster. Depending on the bank and their policies, it can take as long as three months to close on home construction loans. A private lender can close in as little as two weeks.

Another advantage...most banks will charge a penalty for early repayment. If you purchase a property for investment purposes, your goal is to get the repairs done, improve the value and find a buyer quickly.

Let's say that you are able to get a bank loan. You make the needed repairs, find a buyer and resell the property six months later. If you repay the loan in full at that time, the bank will charge you a percentage (the amount varies) of the original loan value. Since they could not make the interest that they planned to, they still plan to get their share. Their share cuts into your profits.

If you choose the right private lender, there are no early repayment penalties for home construction loans You might want to look into it before you begin your next rehab project.