In this guide, I’ll explain the concept of Dutch versus Non-Dutch Interest. I’ll also explain why Dutch interest is a safer option, and cases where Dutch interest is required for rehab or construction loans for private mortgages, also known as hard money loans or bridge loans.
The meaning of Dutch Interest is you, the real estate investor, pay interest on the entire loan amount and not only on the disbursed funds for a rehab or construction loan. Some lenders use the term “Full Boat Interest” but Dutch Interest is the more common term. When using private financing or hard money for a fix & flip or ground-up construction project, the lender typically releases funds for the project in multiple phases. With Dutch interest, you end up paying interest on funds which you don’t yet have access to. Lenders can justify this if the funds have been allocated to you and can’t be used for other loans they wish to fund.
If the loan is Non-Dutch interest, you only pay interest on the funds which have been disbursed. Non-Dutch is also known as “as disbursed” interest. From the information I have, the majority of rehab and construction private mortgage loans today are Non-Dutch. Since it saves investors money on interest costs, it’s obviously the preferred structure, and most lenders offer this to stay competitive.
The Non-Dutch interest structure can be a challenge for lenders in cases where the rehab funds are never used. Let’s say a lender includes a $100,000 rehab budget in your loan, and you later decided that you want to use your own cash to self-fund the rehab costs just to have more control. If the lender has set aside the funds for your rehab budget but you never use them, that could end up being a loss for the lender since that money is not being put to work and not earning interest. I know one lender that recently stopped offering non-Dutch interest because they incurred too many losses with this exact scenario.
Why Dutch Interest is Safer
Obviously, most investors would choose the Non-Dutch Interest option to save money on interest expenses, but there is a case to be made as to why Dutch interest is safer for real estate investors. With Dutch Interest loans, many lenders use a third party fund control company to manage the rehab or construction project after funding. Upon closing the loan, the lender will transfer your project’s funds into an escrow account. After you complete each phase of your project, the fund control company will handle the on-site inspection to confirm that the work was completed, and then they’ll transfer the funds from escrow to your bank account. Since the money is in an escrow account, you have assurance that the funds are available when you need it.
I’m not saying that there is a high risk that your funds won’t be available with a Non-Dutch interest loan, and I believe the risk is extremely low. I have only heard about a handful of cases where a lender didn’t have the money to fund a draw. That said, the reality is the funds for your project are not set aside. The lender may be using that money for other loans, but professional lender always have access to capital when needed. Most lenders are well-capitalized and good at managing their liquidity. And many of them have a bank credit line to help with cash management. If they lend out all of their cash on hand, they can tap the line of credit to fund your draw and then pay down the line once one some of their loans are paid off. If necessary, they can also sell their loans to other lenders.
In late 2023, I heard that a large debt fund wasn’t able to fund construction draws for their borrowers, but I don’t know the reason or the whole story. I also heard of a lender in Southern California that couldn’t fund draws because the fund managers were allegedly running a ponzi scheme and taking money out of the fund for their own personal use. So their fund investors and their borrowers were both getting screwed. These are just two examples of cases where real estate investors couldn’t get the funds to complete their projects. I’m sure there are more, but again, this is extremely rare in private lending.
If you have concerns about the funds being available to you for a rehab or construction project, you may be able to negotiate with your lender to use a third party funds control service. If your loan is Non-Dutch interest, this may be an odd request to the lender. However, if your loan is Dutch interest, and the lender is not using a third party escrow, that’s definitely something you want to address. In this scenario, the lender is charging you interest on your project funds while lending out those funds to other real estate investors and earning even more interest.
Some California Lenders Are Require to Charge Dutch Interest
In California, using a third party fund control and escrow is required for lenders or brokers funding loans under a California Department of Real Estate license, so these loans are always Dutch Interest. This legal requirement means the real estate investor bears a higher expense with financing costs, but the law’s intention is to protect investors and ensure that their project funds are secure and available when needed.
Some lenders use the CFL license instead of a DRE license. The California Financing Law license, issued by the Department of Financial Protection and Innovation, does not require lenders to escrow funds for rehab or construction projects. I know of many private lending companies in California that have both licenses.
How to Find Out If Lenders Charge Dutch Interest
Most private lending companies that offer Non-Dutch interest will promote it on their websites and other marketing. Some don’t even mention it because it’s so common for rehab or construction loans to be Non-Dutch. If you use our platform to search for lenders, it’s very easy to find out if their loans are Dutch or Non-Dutch. First, do a Search on our site for direct lenders. All lenders have a very detailed profile with information about their lending guidelines, including leverage structures, rates, fees and much more. Once you’ve selected a loan type and state, you’ll end up on a search results page with a list of lenders. View each lenders’ profile where you’ll find lots of information about their guidelines. Scroll down the page a bit until you get to the Rehab Value-Add Loans or Construction Loans section.
You’ll see a field labeled “Interest Charged for Renovation Costs.” The answer here is not explicitly Dutch versus Non-Dutch.
“Entire Amount of Total Project Costs” = Dutch Interest
“Only on funds drawn” = Non-Dutch interest
Make contact with each lender directly by phone, email, or send them a loan request.
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