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Loans that are used for the construction and development of commercial or residential property are typically referred to as construction loans. However, compared to the more traditional, conventional loans, there are some significant differences to be aware of. The main way that they differ is that only the interest is paid until the construction phase has been completed. Once the construction is completed, the loan becomes a normal mortgage and is now due.
Characteristics of Construction Loans
During the construction period, the funds are advanced in incremental amounts as the building progresses. Other characteristics of commercial loans include:
1) Building construction and land development costs are covered by the loan proceeds which are dispersed in one of the following manners:
- according to a prearranged repayment schedule
- as each stage is completed
- as needed
- when some conditions are met
2) Loan is paid off over 20 to 30 years from the proceeds of the permanent loan (usually repaid from the revenues that are generated from the finished structure)
3) Secured by the property that is getting financed
4) Short-term financing (up to 3 years)
Additionally, commercial loans are referred to by a number of other names including development loans, construction mortgages, or building loans. Although they can sometimes be difficult to obtain, depending on their size and the type of project that is being undertaken, the downpayment on commercial loans ranges between 5% and 20%.
In addition to the above, the financing of building or construction loans (commercial or residential properties included) are typically issued on a construction-to-permanent loan basis. There are two parts to this type of financing. The first part is a loan that covers the construction costs while the second part consists of a mortgage on the finished structure. The primary advantage of this type of loan is that only a single application is required as the loan converts at the end of the construction period.
Type of Construction Loans
Biz4Loans offers some of the most creative funding options for commercial loans in the entire industry. We also assist you in preparing background and expense principles, feasibility studies, and executive summaries. No matter what the industry you are in and the project you are undertaking, we can help you with all phases including acquisition, development, and construction.
Most importantly, we will work with you to design and develop a funding process that is construction or project-driven and not credit-driven. Here are some aspects to consider:
- Closing – ranges from 6 to 9 weeks
- Funding – based on a traditional draw system
- Loan-to-Value (LTV) – depends on the industry and project
- Permanent Financing – 25-year terms, labor-based rates
- Rate Contraction time – the construction loan requires interest repayment only over 1 to 2 years after which time the prime rate kicks in (depending on the project, allow for 1 to 3 additional points)
- Underwriting – Biz4Loans provides the maximum assistance required in order to handle all logistic and underwriting aspects of your loan