Construction loans are leading schemes that real estate companies apply for to build residential homes for their customers. A common feature in these construction loans which distinguishes them from traditional ones is the “progress payment” clause. This implies that the companies do not get the money they require as a lump sum. The corporate lender sanctioning them the loans disburses the amount in installments. This financier appoints an expert to evaluate the progress of the construction work at different stages. On receiving a satisfactory report from the specialist, does the lender release a portion of the money. The corporate enterprise only pays interest on the sum of money they receive instead of the entire loan amount.
How can real estate companies apply for a construction loan?
Commercial banks and other corporate lenders have their own stringent eligibility criteria for sanctioning a construction loan to real estate companies. Corporate enterprises need to understand what these requirements are to meet them. Moreover, the companies even have to submit copies of the following documents to the lender approving their loan schemes:
- Council plans and local authority permits approving their construction project to build residential homes,
- Audited statements of projected financial costs of undertaking the project which a Public Certified Accountant (CPA) certifies,
- Audited statements of the expected sales value of the houses after completion, which both a CPA and qualified property appraiser certifies,
- The original construction project contract,
- Original building plans which their architects approve and certify,
- Insurance policies in the companies’ name.
The commercial banks and corporate lenders will even expect these real estate companies to provide:
- Proof of their businesses’ minimum credit score that exceeds 700,
- Proof that each of their directors and top managerial personnel has a minimum credit score of over 700,
- A good market reputation, as evident from the positive online customer reviews on their business website,
- Audited copies of their annual financial statements and tax returns for the last three years to prove their financial stability,
- An audited financial statement proving that their debt liabilities are than 40% of their operating income as the debt-to-income ratio indicates, and
- A down payment equivalent to 25% of the entire loan amount and a collateral.
On satisfying the eligibility conditions, the banks and financiers will approve the companies’ construction loan.
Reasons for the loan
Real estate companies might want to take a construction loan for the following financial reasons:
- Pay for the building equipment and material they will need to construct the residential houses,
- Hiring new construction workers or a service provider who outsources employees on their payroll,
- Meet contingency expenses arising from unavoidable damage, accidents, or natural calamities.
Applying for a construction loan enables real estate companies to improve their cashflow position. They can overcome many of the financial difficulties they face when building residential homes for their customers. Unlike traditional loans, this lending scheme has flexible repayment options and low-interest rates. However, these corporate enterprises need to know how to choose the right corporate lender. The commercial banks or financiers they shortlist should have a good reputation in the market and offer attractive schemes. Above all, these corporate lenders’ officials should have experience in disbursing these loans without error or risks.