Understanding Construction Loans

Planning to construct a building on your property? Whether it’s a home or a building with hundreds of floors, you will need huge fund to start it up. Construction loans, also known as story loans are those that are used for these kinds of projects. Lenders know the story behind your planned construction and will primarily look into your income resources to ensure that you can pay the monthly payment of the loan you are applying for. When you apply for a construction loan, the lender’s fundamental guideline for approval is whether the property will be drawing in income once it is completed. They will request for an appraisal and attempt at the forecast of the income that your property will generate to see whether this will be enough to pay for your loan.

construction loans

Many developers seek construction loans when they are a looking to build structures, offices, real estate properties and sell it out immediately after completion. You have to understand that this kind of loan is only for short term and comes with variable rates. Finance companies offering construction loans will charge interests based on the amount of money disbursed to date on different stages of construction. For commercial real estate however, construction loan’s short term rate is usually replaced by a long term loan with reduced interest rates two years after the loan was initiated. Many homeowners utilize construction loans to kick start their purchase of a home then proceed with a permanent financing program to convert it into a mortgage loan after they are issued a certificate of occupancy.

Construction loans’ basic features include short term and adjustable rates. Some can get a lock in interest rate for 6-12 months. This type of loan gets easy financing approval on projects that are strong and with a proven stream of income. Several years ago, you can easily get a construction loan because they are big businesses. But because of recent changes in credit trends as well as financial risks involve, lending institutions now require a stronger package for you the funding to push through. Prepare a pro forma of the project including the income and expenses on at least three years after project completion. Present assumption of pre-lease agreements and make sure that it is not more than 75% pre-leased before you begin the construction. Provide prospective lenders with complete blue prints, specification and times lines so that you can get better chances for construction loan approval.

Image Credit:
DDPAVUMBA – FreeDigitalPhotos.Net

Share Button