A funding construction loan generally takes around 18 to 45 days from application to acceptance, but individual circumstances also play a big role. As it depends on the lender that you get in touch with and also your business’s current financial position, it can be difficult to accurately predict the amount of time that it will take for your construction loan to be approved.
However, with a good understanding of what you must expect when applying for a construction loan and by taking some important steps in the right direction, it is possible to speed things up.
In this article, we will look in detail at the procedure which needs to be followed to successfully apply for a construction loan.
What is a Construction Loan?
Generally, a construction loan is a short term loan which is taken out by construction companies to pay for the costs of a building project. The term of a construction loan varies but is usually more than a year, giving you sufficient time to complete the project. The term of the loan depends on the size of the project. When the construction of the project is complete, you can even try taking out a new loan to pay off the construction loan. This new loan is commonly known as an end loan.
In essence, you are refinancing the existing construction loan at the end of the term. Entering into a new loan of your choice gives you the flexibility that you need to pay off the construction loan at a fixed rate as a 30-year mortgage. Refinancing your construction loan can help you keep up with the heavy repayments that are likely to be a part of a construction loan.
How to Qualify for a Construction Loan?
If you have approached mortgage lenders and banks, you may have sensed some hesitation on their part to give you a construction loan. This is primarily due to the fact that they find it difficult to trust a builder to complete a project which may or may not see the light of the day. It takes a leap of faith to pour money into a building project which doesn’t even exist yet. As the building doesn’t exist, calculating its value when it will exist is also a major challenge. This makes it difficult for traditional lenders to approve construction loans.
Alternative finance providers are known to be more flexible in their approach but even they may have certain requirements which they look for in a construction loan application. These requirements are in place to safeguard their investment in the event that things do not go according to plan. If the value of the property falls or the builder does a poor job, the time and money that they have invested in the project may not be worthwhile. The do
The following are some requirements that finance providers expect their construction loan applicant to fulfill:
Experience and Understanding
Some investors have a defined criteria such as a minimum turnover amount. For example, they may only decide to fund projects which are undertaken by construction companies having a turnover of more than £1 million. A qualified builder by definition is a licensed general contractor who has already earned a reputation for building high quality projects. If you are a new builder you may have a hard time finding a financial institution to fund your project.
Prior experience of building projects can go a long way towards increasing your chances of getting approval for a construction loan. Following experience close on its heels is a good understanding of the project for which you need funding. You must truly understand the costs of developing your project and the lender may be interested in knowing how you plan to keep the costs under control throughout the construction of the project. Underestimating the costs involved in planning is a trait of an inexperienced developer and it may dampen your prospects of being approved for a construction loan.
The Lender may ask for detailed specifications
A construction company which is seeking a construction loan must have the project planned in detail. As there is a huge investment involved, the finance provider may ask a business to provide various types of information relating to the project such as floor plans, complete schedule of construction, the list of materials required and their quantities.
With the help of these details, the lender will be able to estimate the approximate cost of the project. The lender is also likely to have a team of surveyors and experts who can accurately predict the future value of the project.
The plan that you have for your project must cover the following important details:
- When and for what cost do you intend to purchase the land on which construction is to be carried out
- The building costs
- Costs which are likely to be incurred in insurance, marketing, finance, architect’s and professional fees
- Any potential legal issues must be brought to the attention of the lenders along with how you plan to resolve them
- Exit plan which must include how you intend to pay off the construction loan
- You should also include your plan to sell the developed project to a third party
The Final Value Must be Estimated
It may prove to be a difficult task to put a value on something which has not even been constructed yet. However, the future value of the property that you are about to build is an important detail which the lender will certainly be interested in knowing.
The lender may put his own team of experts and surveyors to work to determine the future potential value of the project. For this, they may take into consideration any projects which are strikingly similar to the one you have undertaken in terms of size and location, but have already been completed.
The amount of time that it takes to get approved for a construction loan depends on the factors which have been mentioned above. By taking the steps listed in this article it is possible to improve your chances of making a successful construction loan application.