How Do Construction Loans Work and How to Secure Them

Getting a construction loan is one of the most important aspects of building a new property. Securing the financing does not have to be a difficult process, however. If you have the right people on your side and the proper documentation, you can find your way into the appropriate financial situation. Exactly how do construction loans work?

Here are a few tips on how construction loans are processed and how you can secure the one that will work for you.

What is construction finance?

In most cases, finance for construction is a short-term loan. This loan is used for the cost of paying for the real estate that you are building. House building finance is equivalent to a very large line of credit that builder receives only until the property is fully rendered. The borrower draws on this loan as needed during the construction of the building. After the building is finished, only the portable loan that has been drawn upon gathers interest. This is a much more efficient way of borrowing money than a more traditional loan.

In order to pay off a construction loan, the borrower will usually need to secure a line of permanent financing.

The Construction Loan Process

The first step in the construction loan process is to develop an overall budget for the process. You can seek the experienced construction finance specialist to help you make a plan. Solid plans are essential for creating a cost-effective way to finance the building. This is the only way that costs will be maintained. Setting a budget from the very beginning will also help you to locate your spending limits.

Coming into the office of a lender with a budget will make them more likely to trust you with this huge responsibility. Alongside this paperwork, you should also have your personal income and debt organized. If there is any discrepancy between your personal income in the amount that you are looking to borrow, a professional lender will be able to help you determine a more realistic number. However, you can also form a simpler version of these calculations a construction loan payment calculator.

The Prequalification Process

It is much easier to get a construction loan if you prequalify for permanent financing. Because a construction loan is so much larger than a traditional loan, the bankers that you visit will be assessing your risk profile much more thoroughly. They loan for construction is considered a very high risk investment for any bank. They are betting on the fact that the building will have some sort of value after it is finished. In order to offset at least a portion of this risk, bankers who are in the business of lending for construction projects have a very strict criteria of qualifications. This makes prequalification one of the most important steps that you can complete before going into the office of a banker.

Seek the advice of a mortgage lender so that you can understand the amount of money to qualify for. This will help you to create more realistic expectations for the construction that you are trying to put together. You will need to provide information about the cash that you have on hand, assets to secure the loan and your current income. Your liabilities and debts will also become a very important part of this process. Any automobile loans and student debt that you have will become an issue. You will also need bring in your credit card statements.

If you have a job, do not forget to bring in your two most recent pay stubs. Place these in a file along with your tax returnsand bank statements for the previous three to five years. When you have all this information, you will be fully prepared to see a banker for your construction loan.

Getting the Right Builder

Once you have your finances, you need to properly vet the builder that you choose. Selecting the right builder is another very important part of how to get a construction loan. Many lenders have builders that are trusted within the community. You may actually get better terms on your loan if you do business with a builder that is known to create value in construction projects.

If you do not have any personal connection builders, do not be afraid to ask for references. You can also check with licensing body for your state and the Better Business Bureau. If you happen to drive by a building that has been in your community for many years and has great architecture, do the proper research. Find out everyone who was responsible for putting that building up. This may actually end up being the person that you hire to build your construction project.

Once you have a short list of applicants, you will need to find more references. Personal references are the best metric for determining the reputation of the builder. Ask homeowners who have been in the area for a long time for their recommendations. If you are considering a particular contractor, talk to customers of that contractor. This feedback is essential if you want to get the builder with the appropriate expertise for your project.

The Application Process

After you have chosen a builder that you are happy with, you also need a lender that you are happy with. Believe it or not, different banks have different specialties. If you are going to create a successful project, then you need a lender with a specialty in the construction industry. These are the only people be able to offer you the flexibility in the customer service that will lead to your success.

You need to understand the length of the response period for a construction loan. In most cases, you will be waiting for weeks or even months for an answer. Do not let this deter you; it is par for the course. If you are lucky, you will do business with a bank that gives you an answer more quickly. However, you can use this waiting period to get in touch with other banks so that you have a true picture of market value of your business.

Once you are approved for a loan, you can begin building. However, this does not mean that you should go with the first loan that you are approved for. Being approved for a loan means that you actually have value in the eyes of the lender. You may want to shop around to see if you can leverage this information for better terms on your loan. Make sure that you pick a lender that feel comfortable with, as you will be having many conversations with them throughout the life of your project.