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Construction Lender Red Flags: When to Walk Away
A financing deal that seems too good to be true probably is. Here are some red flags to look out for.
- Red Flags During the Initial Pitch
- They Can't Explain Their Own Process
- Unrealistic Promises
- Pressure Tactics
- Red Flags in Their Documentation
- Overly Complex/Unclear Loan Terms
- Unreasonable Covenants and Requirements
- Red Flags About Their Team and Capacity
- High Staff Turnover
- Overloaded or Inexperienced Staff
- Red Flags During Due Diligence
- Inconsistent or Changing Requirements
- Poor Communication and Organization
- Red Flags from References and Market Reputation
- What Other Borrowers Really Say
- Market Reputation Concerns
- When "Good" Terms Are Actually Bad
- Below-Market Rates That Come with Hidden Costs
- Fast Approval Promises That Create Problems Later
- The Cost of Ignoring Red Flags
- Financial Impact
- Operational Disruption
- When to Walk Away
- Deal-Breaker Scenarios
- The Decision Framework
- Conclusion
- Get Financing
That attractive rate quote sitting on your desk might be hiding a world of problems. In multifamily construction lending, the cheapest money often ends up being the most expensive when you factor in delays, headaches, and relationship damage that comes with the wrong lender.
Here's what most developers learn too late: a construction loan isn't just about the money — it's about the partnership. You're going to spend 12-24 months working closely with this lender, and the warning signs are usually there from the beginning. Let's walk through the red flags that should make you think twice, even when (or especially if) the deal looks good on paper.
Red Flags During the Initial Pitch
They Can't Explain Their Own Process
Professional construction lenders should be able to walk you through their process clearly and confidently. If you ask about their typical timeline and get vague responses like "it depends" or different team members give you different answers, that's a problem. Pay attention to whether they can provide written documentation of their requirements — legitimate lenders have standardized processes they're generally happy to share.
This is particularly important with HUD multifamily lenders, where the process involves specific federal requirements and third-party reviews. A HUD lender who can't clearly explain the phases of HUD approval or their coordination with HUD's process probably lacks the experience to handle your deal efficiently.
Unrealistic Promises
Be wary of lenders who guarantee timelines that seem too good to be true or claim they "never" have delays. Experienced construction lenders know that external factors can impact any project, and a lender who doesn't acknowledge these realities either lacks experience or isn't being upfront with you.
Similarly, watch out for promises that contradict industry standards. If every other lender quotes 60-90 days to close but one promises 30 days, there's probably a catch — either they're cutting corners or making promises they can't keep.
Pressure Tactics
Legitimate lenders don't need to pressure you into quick decisions. Be suspicious of "limited-time offers" on standard loan products, or lenders who discourage you from shopping around or speaking with their other borrowers.
A construction lender who rushes you through due diligence is likely to rush through their own underwriting too, which often leads to surprises and problems later in the process.
Red Flags in Their Documentation
Overly Complex/Unclear Loan Terms
Construction loan documents should be thorough but understandable. If you need a lawyer (or a translator) to understand basic terms around draws, inspections, or change orders, that's a warning sign — excessive complexity often hides unfavorable terms or gives the lender too much discretionary power.
Pay special attention to buried fees that weren't discussed upfront and vague language around the draw process. Professional lenders disclose all fees upfront and use specific terms for approval timelines, not phrases like "reasonable time" that give them wiggle room.
Unreasonable Covenants and Requirements
Some loan covenants are standard, but excessive reporting requirements or unrealistic completion timelines show a lender who doesn't understand your market or construction processes. If they're demanding a 12-month completion timeline when every contractor says 18 months is realistic, you're only looking at future problems.
Overly restrictive change order policies are another warning sign. Construction always involves some changes, and experienced lenders have reasonable processes for handling them rather than treating every small adjustment like a major loan modification.
Red Flags About Their Team and Capacity
High Staff Turnover
If your loan officer just started last month or the construction lending team has been rebuilt recently, be cautious. It isn't necessarily a dealbreaker, but…construction lending requires experience and institutional knowledge that takes time to develop. You don't want to find yourself constantly re-explaining your project to new people.
This is especially important for HUD multifamily deals, which require specific knowledge of HUD processes and federal requirements. A HUD lender with high turnover may lack the institutional knowledge needed to guide your project through the complex approval and oversight process.
Overloaded or Inexperienced Staff
A loan officer managing 40 active deals can't give your project adequate attention, and an underwriter with a three-week backlog will slow every step of your approval process. Ask about current workloads and pay attention to their construction team's experience with your specific property type.
Long response times to basic questions during the initial process are a preview of what's coming. If they take days to respond to simple inquiries now, expect weeks when you need urgent draw approvals later.
Red Flags During Due Diligence
Inconsistent or Changing Requirements
Professional lenders know what they need upfront and ask for it systematically. If you're constantly getting requests for new documents that weren't mentioned initially, or if different team members are asking for conflicting information, that's a sign of poor internal coordination.
Moving goalposts on approval criteria are particularly concerning. If underwriting requirements keep changing as you provide information, either the lender doesn't know their own standards or they're finding problems they don't want to address directly.
Poor Communication and Organization
Lost documents, missed deadlines on their end, and repeated requests for the same information all point to operational problems that may only get worse during construction. A lender who can't manage their own loan approval process efficiently won't suddenly become organized when handling your draw requests.
Inability to coordinate their own internal processes is a major red flag. If their appraisal coordinator doesn't talk to their underwriter, expect communication breakdowns throughout your project.
Red Flags from References and Market Reputation
What Other Borrowers Really Say
Don't just ask for references — dig deeper with specific questions about draw approval times, communication quality, and how the lender handled unexpected issues. Listen for diplomatic language that might be masking real problems, and stories about significant project delays due to lender issues should be deal-breakers.
Ask references if you can follow up with questions after you've had more interactions with the lender. Sometimes issues become apparent only after you've worked with someone for a while.
Market Reputation Concerns
Check with other developers, contractors, and real estate professionals in your market. A lender with a reputation for difficult workout situations or frequent disputes with borrowers will likely bring that same adversarial approach to your project if problems arise.
Recent regulatory issues, frequent changes in lending leadership, or a pattern of pulling out of markets should all raise concerns about their stability and commitment to construction lending.
When "Good" Terms Are Actually Bad
Below-Market Rates That Come with Hidden Costs
A rate that's significantly below market usually comes with trade-offs elsewhere — extensive fees, restrictive terms, or poor service levels often offset any interest savings. Calculate the total cost of the relationship, not just the interest expense.
Sometimes below-market rates indicate a lender who's desperate for business because their reputation has driven away other borrowers. Be particularly cautious of lenders offering terms that seem too good when compared to established, reputable competitors.
Fast Approval Promises That Create Problems Later
Rushed underwriting often misses important details that become problems during construction, and a lender who promises unusually fast approvals might be cutting corners in their due diligence. This sets both of you up for surprises later.
Inadequate construction oversight during the loan approval phase often carries through to inadequate support during actual construction. If they're not asking detailed questions about your construction plans now, they probably won't provide helpful guidance when issues arise.
The Cost of Ignoring Red Flags
Financial Impact
Working with the wrong lender can easily cost more than any interest rate savings. Project delays from slow draw approvals can extend your construction timeline by months — one developer recently calculated that a 90-day delay caused by lender inefficiencies cost over $400,000 in additional interest, insurance, and overhead on a $25 million multifamily project.
Contractor relationship damage is another hidden cost. Contractors who get burned by slow-paying projects will either avoid your future projects or build significant payment cushions into their bids. That could potentially affect your business for years.
Operational Disruption
Time spent managing lender problems takes away from actual project management and business development. Your team ends up focused on paperwork battles instead of construction oversight, potentially causing quality issues and additional delays.
The stress and distraction of dealing with a problematic lender affects your entire organization's performance and can impact other projects and relationships.
When to Walk Away
Deal-Breaker Scenarios
Some red flags are serious enough to end discussions immediately — fundamental misalignment on project approach, inability to demonstrate basic competence, or multiple red flags indicating systemic problems. Don't ignore your instincts; if interactions feel adversarial during initial discussions, they'll likely get worse under construction stress.
Consider the opportunity cost of delays and disputes. Missing your target completion date can cost months of rental income and potentially impact other projects in your pipeline.
The Decision Framework
Weigh short-term savings against long-term risks. A quarter-point higher rate with a competent, experienced lender often costs far less than problems with a cheaper but problematic alternative.
Factor in the value of your time and stress. Working with a professional, efficient lender lets you focus on development and business growth instead of constant lender management.
Conclusion
The construction lending market offers plenty of options — find out what's available in your project's area in seconds — so you almost certainly don't need to settle for a lender who shows warning signs just to get attractive rates. The most expensive money is often the money that comes with operational problems, delays, and relationship damage.
When you find red flags during your lender evaluation, don't ignore them. Spending a bit of extra time finding the right lender can save you months of problems and tens of thousands of dollars in additional costs — particularly important in multifamily construction where projects are complex and timelines are critical.