Not all construction projects are eligible for a commercial construction loan. There are several factors that a lender will consider in order to determine eligibility. A commercial construction loan is a type of loan that is used to finance the costs associated with the construction or renovation of a building used for commercial (business) purposes.
Once your broker has identified the best lender for your commercial construction loan, the next step is to begin the application process.
During this process, the lender will evaluate your personal and business financials, your credit score, and many other factors that will determine both whether you’re approved and what your interest rates and terms will be.
Because construction loans are considered high-risk, you will need to provide the lender with a detailed business plan. This should include an overview of what your business does, its financials to date, details about your current operations, and future projections.
You will also need to provide your lender with specific details about the project. This includes a complete plan with specs and designs. An expected project cost, including estimates for contractors, materials, and other expenses, must be provided with your application.
Personal and business financial documents will also need to be submitted during the application process. These include, but are not limited to:
There is variation in documentation requirements requested by each specific lender.
The lender will pull your credit score during the process. Remember, lenders are looking for scores in the high 600s and higher.
With some lenders, negative items such as bankruptcies, foreclosures, and past defaults on loans may automatically disqualify you from receiving a loan. For each negative item on your credit report, a full explanation to the lender will be required.
Because this is such a high-risk loan product, most mainstream lenders will typically take at least a minimum of several weeks to go over your information. During this time, more documentation may be required or your lender may have questions, so make sure to make yourself available to comply with their requests to expedite the process.
Once the lender underwrites and approves your loan, you’ll move into the settlement process. This entails going over the loan agreement, which will include all dates and milestones throughout the process. Once all paperwork has been signed and the settlement process is complete, you’ll be ready to begin the expansion of your business.
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Your dream of a new house can challenge even the best-made plans, however, a RedCap Finance Brokers can take a lot of stress out of the equation.
NOTE WELL: ALL LENDERS CONSIDER CONSTRUCTION LOANS - HIGH-RISK! So the assessment process is much more intense and more detailed information will be required from you in order to get final approval.
Let’s look at how CONSTRUCTION LOANS work.
You know what construction loans are and how they can help you navigate cash flow challenges of the building project; it's time to understand what exactly is a progressive drawdown loan.
By allowing you to draw on your construction loan bit by bit as needed – known as ‘progressive drawdown’ – your interest payments are lower than if you borrowed the whole amount upfront. A progressive drawdown – or progress payment – is the portion of your loan funds the lender will release at each stage of construction.
If you’re using a registered builder, the lender will pay them directly at each stage of the build (assuming you’ve met the lender's requirements). Among other things, the lender will need to see the builder’s invoices, proof of stage completion, as well as a progress claim certificate that you have authorised for payment.
If you’re an owner-builder, the lender will release the funds to you when the lender gets proof of itemised invoices and receipts – and provided you meet all the lender's other requirements. The lender will need these at each completed building stage. Importantly, they must match up with the progress payment schedule both parties agreed to when the lender approved the loan.
Usually, construction loans are designed to ensure you don’t draw more than you need – or exceed the construction costs you’ve budgeted for.
That’s why most construction loans begin with an interest-only period. This means you’ll be paying interest-only – and you pay only on the amount you’ve actually drawn down. This assists you to limit the extra expenses while you are building your new home and paying rent as your new home is being built.
A construction loan is a standard home loan – with additional building conditions. So what’s the difference? Let’s look at two $500,000 loans – one standard, one construction – to see how it works.
If you have a standard home loan – without building conditions – you must draw down the total loan by a certain time. The full $500,000. That means you’re paying interest on the whole loan amount – all $500,000 – from the start. In addition, the bank has a saleable asset to sell - a completed house - if you fall in hardship and cannot repay the loan, this gives more peace of mind to the lender that they can get their money back from in a worst-case scenario.
But if you have a construction loan for $500,000, then you draw down what you need in instalments, to cover the costs of each part of the project. If your first invoice from the builder is for, $51, 857, then that’s what you drawdown amount will be once approved. That’s what you pay interest on. You only pay interest on the rest when you draw it down later in the project. However, in this case, the bank is lending you money to make a dream become a reality. As much as we could complain - you don't have a tangible asset to sell to cover the bank's investment in your dream if you do not complete the project - therefore the bank will scrutinise your loan application and serviceability more thoroughly, as they need to protect their investment from failure as well.
Before you start building, the lender will order an ‘as if complete’ valuation – an estimate of the market value of the land and proposed building/renovation ONCE COMPLETED. We also require further inspections and valuations throughout the project to be sure everything’s on track and within budget.
More Information About Valuations - click here
Many times there is a SHORTFALL in the valuation i.e. that is the bank valuation comes in lower than what your contracted project build price is.
In this case, you may need to not only pay your deposit, but you will also need to fund 100% of the shortfall amount. This is when many applications FALLOVER because you cannot fund the shortfall amount required.
Cost overruns are when the building expenses exceed the planned progressive payments we agreed to at the start of your loan. We understand this sometimes happens. You might change your cladding from timber to brick. You might opt for wooden joinery instead of aluminium. Or you might simply decide you want double powerpoints instead of single ones.
If you exceed the amount we agreed upon, talk to us ASAP about the next steps. If we can’t provide additional funding, you’ll need to cover the extra costs yourself.
Once your work is done, we’ll need some last bits of paperwork before the lender will release the final portion of the money.
Once the interest-only period of your loan ends, normally your loan converts and becomes a principal and interest loan. If you finish building before then, you can change the loan over to principal and interest. You’ll need to contact us to do that.
Contact RedCap Finance Brokers who will assist you to narrow down your options of suitable loan products for your situation.
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