In the following article I share what I learned about Construction Loans. In today’s world business has taken a great leap. Hence forth a need towards the business infrastructure arises which involves huge cost for construction of building for carrying out its operation or for renovation which generally discourage firm to carry on the construction of its infrastructure. All this gives rise to the need of construction loans.
A businessman’s money is always stuck up in market which makes it difficult to bring adequate amount of funds for construction, renovation or for buying business sites or commercial buildings. For this purpose banks have relieved the entrepreneurs by bringing in the concept of construction loans. In the fast growing economy of the country, businessmen need to buy plots, building or select sites to carry on their business and other related commercial activities.
To finance one’s business plans one can fully rely on construction loans. Loans which demand you to place collateral security are known as secured commercial construction loans. These loans offer better rate of interest & can be repaid flexibly. Whereas loans which does not require any collateral are unsecured loans carrying either fixed or variable rate of interest.
Fixed rate interest loans must be preferred by entrepreneur as it is known much in advance as to how much is to be paid every month which further makes business planning & budgeting more efficient. However variable interest rates fluctuate from time to time which increases risk to pay more in future.
It is always better to talk to a mortgage company before taking up for loans. The lenders which deal with loans are happy to provide you loan for very lucrative projects because they also make profit out of it. Construction loans are main business for the mortgage companies and in case you have a vacant plot at a very commercial/central place then money lenders will offer very good offers along with loans.
Money lenders will provide you cash for the construction of new house and when you complete the project you can sell the same with huge profits which obviously is shared by money lenders. Basically the other money lenders /builders provide you the loans for construction in the same way i.e. the amount of loan + interest converted into EMI, which is prevalent now a days in market.
Construction companies provide loans with higher interest rates than the other money lenders because of all services at one go & you have not to worry about documents & other formalities. Though it is a time consuming process but once you find loan with favoring terms & conditions, you feel the time is worth spending.
The various aspects which a money lender will look before providing construction loan are:
- Income and existing debts.
- Ability to repay back loan.
- Reasons for taking loan
- Collateral security given
- Investment in business
- Partners involved in business.
One has to complete few formalities before taking up loan such as they have to provide a few documents to the lender & application made for loan must be in the form of a request. The application should cover up some important points like amount to borrow, purpose of borrowing & working capital in hand. The borrower has to submit certain documents & provide accurate information about his present debts, payment modes, date of maturity etc to the lender, so that he is fully satisfied before lending money for purchasing real estate, construction of building & renovation of premises.
An entrepreneur planning to start a new business can avail construction loans only after providing business plan including cash inflows for first 2 years so as to ensure him about repayment of loan.
Nowadays another option is available i.e. to get online loans, it not only saves time but also helps to search an appropriate & hassle free loan deal.
Apply for Construction Loans
Today is the time of competition & there are so many choices available in market such that it becomes difficult to choose the best suited option. Therefore one needs to look into various aspects before going for one option. First step is to find out the exact amount of loan that would be available for financing. This will make it easier to calculate the overall cost of the project.
One must also have an idea in advance about additional costs involved such as closing costs & other expenses involved with providing utilities. Next step is to decide a home design. An architect & contractor would be the best to contact but they would charge high fees to adopt general plan of your specific design. Therefore one must get full idea of costs involved in building up a house. But it can be finalized only after talking to architects & drawing up your plans.
Approach your lender for the construction loan only after your plans get finalized. These plans are needed to be submitted to lender before he provides you any money. Remember his pre approval does not always mean that your loan is finalized. One must have the knowledge of all the options available to him & should try to go for that construction loan which is easily convertible to a permanent loan. This will not only save money but can also be obtained easily since it will be from the same lender.
A small down payment is required to qualify a construction loan. If one is not wiling to pay private mortgage insurance (PMI), he needs to pay a higher down payment. Another option to avoid it is by getting first mortgage for larger amount & balance amount in second mortgage. One must be aware of the trends in interest rate prevailing so as to understand what option would suit best, a flexible rate mortgage or a fixed rate mortgage.
Now days due to tough competition, everyone has started offering construction loans which have lowered down its cost. One must be efficient enough to see hidden charges involved in it. The nice thing about taking construction loan is that one can always withdraw money whenever needed and once the job is done, it can be refinanced.
Facts about Construction Loans
Credit & its impact on Investment Loan
The position of the Credit helps to decide how much one qualifies for getting commercial real estate finance and which class of interest rate is best suited. It is must for obtaining Commercial real estate financing but many people do not pay much heed to maintaining their credit documents in customary.
Good credit refers to filling of twelve to fifteen “TRADE LINES” of veteran Credit in a credit statement, with numerous real estate loans presenting dynamic or productively paid off, like automobile loans, charge cards, existing mortgage which are already matured by two years should have been productively paid off, which means that all payments should be timely paid o these loans All the real estate loans must have been productively paid off.
However if the payment gets delayed by 30 days or if the credit statement shows some previous collection accounts, he should not worry as no one is perfect. Nowadays making of credit reports involves many complicated procedures for the process of evaluation of credit patterns. The greater the quantity, the lesser the risk is the “default” on the loan incurred by the borrower.
Repair your credit
In order to eliminate the scar of ‘bad credit’ from statement, one need to write an easy communication or give a telephone call to Credit Card Company that had issued you the “credit” will put you on the accurate path. However, it is not essential; it depends on the current credit pattern.
Role of Investment
The investment assets loan plays a vital role in deciding whether or not a lender of loans will to resolve to sponsors your subsequent Property. Investing in properties and their relevant loans involves greater credit risk than the purchasing of you’re your own home. The chances of approval of loan are higher if there is a proven record of successfully selling or managing investment properties with all timely payments without any delay.
Therefore it can be concluded that “credit history” plays a major determinant to judge one’s ability to finance real estate. If investment plan & credit history are strong, then one can get the best deal out of your loan. Therefore an advice would be to pay close attention to area of your financers in order to be an active investor & manage your credit efficiently.
Commercial properties relating to older investment properties that are neglected by the existing owners or the properties that lost their owners because of the hard times, an opportunity is being given to the qualified investors to buy such property at discounted rates along with much leverage.
Construction loans which are given on the commercial property help the investor to finance with one fourth of the entire expenses of the project but the amount of construction loan should not go beyond three fourth of the total value. In order to avail the best possible deal, one must have good credit history and strong plan of investment. If the loan application is accepted one can very easily establish with the project.