Builder construction loans can be secured by either a commercial builder who plans to resell the completed project or a property owner who plans to be a post construction occupant.
But whether you’re a builder or property owner, the basic process for qualifying for construction financing is largely going to be very similar when we’re talking about building a residential home on a single lot. The constructon loan provided will evaluate the equity in the property where construction will take place, any investments to be made by the borrower against the construction costs, and the third party appraisal of what the post construction project will be worth. From this assessment, the lender will determine the amount of financing that can be provided against the construction costs, and the amount of investment, if any, that will be required by the borrower prior to issuance of the first draw down against the approved mortgage funds available.
When there are multiple lots involved with a builder application for financing, the qualification process for a construction loan will be based to a large extent on the exit strategy the builder has for selling off completed units.
For instance, if the builder has 10 plus lots to build out, but plans to build only two units at a time, the construction financing would likely be based on the costs for those two individual projects. When the builder gets the buildings sold, the construction loan account can be paid down and funds will then be available for additional builds. Each time a lot is sold, it will be released from the mortgage security, so the remaining real estate value will have to be sufficient to cover the equity requirement of the construction loan facility, otherwise the builder will have to provide incremental capital as lots are released.
If the builder planned to build out ten lots at the same time, the lender may require that in addition to the construction loan requirements, that either a take out mortgage be arranged to pay out the construction loan, or that a certain number of presales be in place prior to loan disbursements being made.
Or, much like a property owner coordinating a self build, a commercial builder can arrange a construction loan for an individual lot and unit build that will be retired at the completion of construction by a long term take out mortgage, real estate sale, or inventory loan.
For commercial builders, the larger the construction request, the more the lender is going to focus on 1) builder investment and timing, 2) builder qualifications, and 3) the number of presold units or other relevant exit strategy.
Once a builder gets a number of projects completed while using a particular lender for building construction financing, there is a good chance that the lender’s comfort level will increase which can result in more favorable terms and higher borrowing levels on similar projects.
If you’re a commercial builder or owner working on a self build project and you’re seeking a construction loan for your project, I suggest that you give me a call so I can quickly assess your requirements and provide relevant construction mortgage options that we can go over together.
Commercial builders that develop a relationship with a construction lender over a series of projects may be able to secure better rates and terms over time that one off projects as the volume of repeat business and the predictability of the result will have a value to certain sources of construction financing.