Everything You Need to Know About Construction Loans
Whether you’re a seasoned businessman or a new entrepreneur looking to set up an office, finding the perfect place can be difficult. Rising rental costs, lack of customization, and overall dissatisfaction may have led you to believe that your business may never find the perfect office.
But what if we tell you that a construction loan is a solution to all your problems. Buy raw land, secure a construction loan, and build the office of your dreams. It’s that simple!
To know everything about construction loans and how to get one in the U.S., continue to read this blog.
What is Construction Loan?
A construction loan is a type of private or commercial property loan that lets you purchase vacant land and construct a building from scratch. The benefit of acquiring a construction loan includes the liberty to construct a fully customized commercial building such as an office, shop, or hotel and benefit from a short-term loan schedule.
Types of Construction Loans
In 2020, construction loans acquired by businesses and individuals in the US amounted to $362 billion. Here are the four types of construction loans for you to choose from.
A construction-only loan, also known as a two-closing loan, is the type of loan that you acquire to finance the construction of a project. At the end of this loan term, you’re required to apply for a traditional commercial property loan, i.e., a mortgage that you’ll then pay off separately from the construction loan. A downside to this type of loan is that you have to deal with two closings and multiple pre-approvals.
The construction-to-permanent loan is also called a single-closing loan. This type of loan allows you to acquire a loan for the construction phase and convert it into a traditional mortgage upon its completion. You’re then required to pay for both the construction loan and the mortgage over a specified time and have only closing to deal with.
Construction Renovation Loan
In case you are unable to find vacant land that fits your budget and office building needs, you can opt for a construction renovation loan. Through this loan, you can acquire an office building and renovate it according to your needs. In case you already own an office and want to move to a bigger space, you can consider a bridging loan to help bridge the deficit in your payment.
An end loan is the type of construction loan that’s acquired towards the end of the construction project. This loan can help you complete the construction if you’re falling behind deadlines or have limited resources.
How Construction Loan Differs from Mortgage
Construction loans are different from mortgages in many ways. Here are some key differences between the two.
Lender to Builder Disbursement
In contrast to a traditional loan that a private money lender or bank disburses to a borrower directly, a construction loan is disbursed to the builder. This means that while you get the loan approved, you’ll not get paid directly.
Monthly Draws of Payment
A mortgage loan or a commercial property loan is granted as a lump sum. However, a construction loan is disbursed in the form of installments, also referred to as draws. The lender releases each draw after the builder has completed construction milestones and the lender has verified it through an inspector.
Pay Back Only for the Drawn Installments
Fortunately, you don’t have to pay the whole approved loan amount in case the construction project comes to a standstill or faces unexpected delays. Instead, a construction loan and its interest are only to be paid up to the amount that has been disbursed to the builder.
How to Apply for Construction Loans
A construction loan has many benefits for commercial entities and investors. Here’s the process if you want to apply for a construction loan.
Find a Builder
Private lenders that grant construction loans do so with due diligence. To increase your chances of getting a loan approved, find a credible builder first.
Find A Hard Money Lender
The next step is to find a hard money lender who’s willing to offer you a fast-tracked loan with suitable loan terms. You may also need to present documents such as:
- Detailed plan
- Realistic budget
- Proof of income / Credit score
Get Pre-Approved and Start Construction
Getting pre-approval will prevent you from spending your money on a blueprint that you may eventually fail to materialize. Similarly, a pre-approval will increase your chances of purchasing the desired real estate.
We Are Here to Help!
If you’re weary of the commercial lending process and need a commercial and corporate lending expert, get in touch with us at Commercial Private Equity. We offer asset-based business loans, bridging loans, and construction financing.