Real Estate Construction Loan

A real estate construction loan is easier to acquire if the borrower has previously done business with a lender. Having experience and paying off previous construction loans can work in a borrowers favor when applying for a real estate construction loan. Before approving funding a bank will want to see projections of how the money will be paid back. Projections help an appraiser to set estimate value of a specific job. A lender may also ask to see a schedule where the borrower shows previous jobs that he has been involved with. A lender may ask for some out of pocket equity to help provide security for the loan. Other concerns may include zoning restrictions, environmental issues, roads, and utilities.

Hard costs and soft costs are both considerations when looking at a real estate construction loan. Hard costs are comprised of building costs for the project that includes the land. Soft costs are all other fees that go towards the completion of the project such as overhead expenses and professional fees. A lender will want to see exactly how much is going to be spent on hard costs and soft costs so that the process of the construction can be monitored in dollars and cents. Soft costs could vary depending upon the condition of the property, if environmental clean up is necessary, or other types of issues prevent immediate building to take place. "And it came to pass, as they journeyed from the east, that they found a plain in the land of Shinar; and they dwelt there" (Genesis 11:2).

A construction budget consists of the cost of the project and how the interest is going to be paid until the project starts making money. If a borrower is planning on building apartments on a certain area of land, he or she may want to opt for financing on the land first and then use the money for the land to start paying on the real estate construction loan until the apartments can be leased or sold. Included in the construction budget should be time constraints on the building and when the money will start coming in from the sale or lease. Doing the building in stages can allow the borrower to complete so many units and have those units sold before continuing the building on the remainder of units. This process allows the borrower to have money coming in to help with repayment of the loan before the construction is actually completed.

A developer of real estate will want to consider all costs when making a budget for a real estate construction loan. Costs that will be incurred for a project would include utilities and taxes, among other things. Banks may not finance but around 75% of the appraised value of a property. An environmental audit may be mandatory if the property is not already zoned residential to make sure there are no contaminates that could threaten human life. Environmental issues can end up costing the borrower if contaminates are found. If they are bad then building will have to be postponed and may be cancelled altogether. If the site is zoned residential and there have been residents on the land then an environmental audit will probably not be mandatory.

Properties that qualify for commercial real estate include apartments, car dealerships, funeral homes, hotels, medical clinics or hospitals, retail buildings, condominiums, and so on. A real estate construction loan may include remodeling, rebuilding, or new construction. Various lenders make applying easy by supplying an application that can be accessed on the Internet. Qualifications will include plans on what is going to be built, what materials will be used, the cost of materials, labor to complete the work, cost of the land, and the costs for plans and permits. The general contractor that will do the job will be required to furnish the lender with a resume, and a builder's application. The lender will usually do a credit check on the contractor. Contractors usually have to be re-qualified every six months.

The borrower should have a written contract with the builder before applying for a real estate construction loan. The contract should clearly state the responsibilities of both. The scheduled dates for construction to start should be included in the contract as well as the date of scheduled completion and proposed date of occupancy. Line by line breakdown of costs should be included as well as the amount that will be provided to the builder upon completion of the project. All parties should be listed in the agreement including the architect, subcontractors, contractor and owner. The responsibility of each party should be spelled out in the contract and should be signed by all parties.

Some lenders have contact information about reputable contractors. They can also provide information on contract plans. Some states require that contractors and builders are registered with the state. Many lending institutions will not do business with contractors and builders on a real estate construction loan unless they are registered. Make sure the contractor has experience in various building projects including building from the ground up. The contractor should be willing to supply an itemized list of materials and the cost of materials used in the project. A borrower should make sure that the contractor has liability insurance and workers compensation insurance. In addition, the borrower should have the building inspected as completion takes place by the county or city inspector before paying the contractor for the work.

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