What Banks Want You to Know About Construction Loans
Construction Loans are sometimes the most complicated real estate loans a business owner can enter into. The reason being all of the moving parts to the transaction. And things must happen in a very specific order. These loans are for the construction of a building or for improvements to an existing building being purchased sometimes referred to as TI’s or Tenant Improvements. After the construction is finished that “construction loan” will then convert into a “permanent” loan. The Mortgage thereafter is just like a home mortgage in a lot of senses such as if the payment is not made the lender would have rights to take the property. The details and intricacies of the note need to be made clear to the borrower so that after the construction is done your permanent financing will be easily handled.
Qualifying for this type of loan is similar to any other type of loan with a few additions. These supporting documents help illustrate to the bank the borrower’s strength, property details and basic requirements to show that the borrower can qualify for the financing and actually complete their construction on the building.
•Plans and Specifications of the Construction Project
•Estimate prepared by a licensed General Contractor
•An Appraisal of the property and the plans
•Title information about the property (meaning a Title Report)
•Hazardous Materials survey and report
Personal and Business financial information required:
•Business Loan Application & Business Schedule of Debt Current Year Interim P&L and Balance Sheet
•3 years Business Tax Returns
•Accounts Receivable and Accounts Payable aging report
•3 months banking statements for your principal banking relationship include CD’s, Business Checking accounts, Savings accounts, etc.
•Personal Financial Statement for each owner
•Most Recent Brokerage/Bank statements
•3 years Personal Federal Tax returns
There are some upfront fees before the loan is even obtained such as Plans and Specifications. I’ve seen some business owners use a business line of credit to pay for plans. Also make sure you have approvals from the County & City levels done beforehand.
Doctors often time finance their buildings using an SBA loan. And if they can use a local bank loan combination so much the better.
Wells Fargo offers SBA 504 and 7a financing options for construction projects. The 504 is typical for ground up projects and the 7a for shell build-outs. 51% or more of total building square footage must be owner occupied; with the expectation that they will be expanding their business.
Basically, banks want to be careful & very thorough on the expenses for the project and that the borrower can support the loan. A good tip is to have a budget with detailed cost breakdowns. Any major line item must be supported by a bid. Banks also want to know that the builder or General Contractor is credit worthy. If you can get a loan of money to immediately try to open the site http://www.onlineloanresources.com/.
I hope this helps you with some of the basics for the “sometimes” confusing Construction Loan process.
