construction loans - Posted by Richard.P.Belliveau

Real Estate Investing Real Estate Financing
1

Posted by Ed Garcia on June 29, 2002 at 12:26:14:

Rich,

The best candidates for this type of loan, is you local bank. They are portfolio lenders who’s objective is to service the local community. They have the ability and the accessibility to do inspections and release funds on a voucher system as the work is being done.

Here is some information that I gave to a gentleman named Chuck that may be useful in understanding the utilization of a construction loan.

Construction Loan

Chuck,

I have done construction loans. What you are attempting to do is not as complicated as it seems.

You will need the following.

(1) LAND: Either free and clear, or 50% paid down for a land draw.
(Note) If you wanted, you could buy a lot with NO money down, have the seller subordinate their loan to a construction loan. I know that you already have your lot Chuck; I just wanted to mention that for the benefit of others who might be reading my post.

(2) PLANS: These plans have to be approved by the city your building in.

(3) PERMITS: As you know, sometimes the City can require you to build either conforming structures or off sites, that the City wants. The will also have building standard for your area.

(4) COST: The Bank will require a COST BREAKDOWN of all of your expenses. They will want to see a cash flow chart to pay you on a VOUCHER system. As each phase is down and signed off by city inspectors, the contractor will be paid for that phase. (Note) interesting enough, the bank will take your cost break down and analyze it with their computers. If the cost is more, that will concern them, and they will cut it back. If it’s less, that will also concern them because they will think you short changed yourself in building this project. So In essence, the bank can be instrumental in verifying your cost. However, don’t ever count on anyone but yourself. Do your own, do diligence. (Note) the bank will require at least 10% liquidity on you the borrower.

(5) CONTRACTOR: If you are a Contractor, the bank will want to see your resume and you contractors license. If you are not a Contractor, then the bank will want to have a resume on your contractor as well as a copy of his license, and financial statement.

There are other considerations, but this is enough to get you thinking in the right direction. If everything is done right, you should be in the deal about 70% to 75% LTV on a NEW property. In fact I have seen better depending on area, and size of the deal.

Good luck Chuck, I hope this helps.

Rich, I hope that this has shed a little light on the subject for you,

Ed Garcia

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construction loans - Posted by Richard.P.Belliveau

Posted by Richard.P.Belliveau on June 29, 2002 at 03:22:08:

Hello. I have come across a situation where another broker in Colorado has sent me the info. on a reputable builder in that area who needs to borrow 750k over a 1 year period. Can anyone help me to find a lender who makes those loans and what would the requirements be? Thanks in advance!!

Rich in Vegas

3

A construction loan is a specific type of loan designed to help individuals or businesses finance the construction or renovation of a building or property. These loans are typically short-term, and they provide the necessary funds to cover the expenses associated with constructing the project. Once the construction is complete, the borrower can either pay off the loan in full or refinance it into a more traditional mortgage.

Here are some key points to understand about construction loans:

  1. Purpose: Construction loans are used to cover the costs of constructing a new building, renovating an existing property, or making significant improvements to a property.
  2. Short-term: These loans are usually short-term loans, often with terms ranging from six months to two years. The short term is because construction projects typically have a specific timeline, and once the project is completed, the borrower intends to secure permanent financing or sell the property.
  3. Phased Disbursement: Unlike traditional loans, where the full amount is given at once, construction loans are disbursed in phases or “draws” as the construction progresses. This helps ensure that the funds are being used for the intended purpose and minimizes the risk for the lender.
  4. Interest Payments: During the construction phase, the borrower typically makes interest-only payments on the amount drawn from the loan. These payments are based on the amount of money that has been disbursed and not the full loan amount.
  5. Collateral: The property being constructed or renovated serves as collateral for the construction loan. If the borrower defaults on the loan, the lender can take possession of the property to recover their investment.
  6. Higher Interest Rates: Construction loans often come with higher interest rates compared to traditional mortgage loans. This is because they are considered riskier for lenders, as the property is not yet built or may require significant improvements.
  7. Qualification: Qualifying for a construction loan can be more challenging than getting a regular mortgage. Lenders typically require a detailed project plan, a well-thought-out budget, and a qualified contractor to minimize risk.
  8. Conversion to a Mortgage: Once the construction is complete, borrowers can choose to pay off the construction loan entirely or refinance it into a traditional mortgage, such as a fixed-rate mortgage or adjustable-rate mortgage (ARM).

Construction loans are commonly used by individuals building their own custom homes, real estate developers working on residential or commercial projects, and homeowners undertaking significant home renovations. It’s essential to work closely with a reputable lender experienced in construction loans to navigate the complexities of the process successfully.