Navigating the Commercial Loan Construction Process
Understanding the Basics
Securing a commercial loan for construction can seem complex, but breaking it down into clear steps makes it easier to understand. Here’s a brief overview of how the process works:
### **1. Pre-Approval**
Before starting a construction project, you’ll need pre-approval from a lender. During this phase, the lender will review your credit, financials, project plans, and business history. You’ll also need to submit a detailed proposal, including project costs and timelines.
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### **2. Loan Application and Underwriting**
Once pre-approved, you submit a formal loan application. The lender performs underwriting, evaluating the project's feasibility, market demand, and your ability to repay the loan. Key factors considered include:
- **Loan-to-cost (LTC)**: The percentage of project costs the lender is willing to finance.
- **Debt service coverage ratio (DSCR)**: Ensuring the project will generate enough income to cover loan payments.
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### **3. Construction Loan Terms**
Construction loans are typically short-term, lasting 12-36 months, with interest-only payments during construction. Once construction is complete, you’ll need permanent financing to pay off the construction loan or convert it into a long-term loan.
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### **4. Draw Schedule**
Instead of receiving all the funds upfront, you’ll work with the lender to create a draw schedule. This means funds are released in stages (or "draws") as construction milestones are met. Lenders inspect the project at each stage to ensure progress.
### **5. Loan Conversion or Refinancing**
Once the construction is finished, the loan is either converted into a permanent mortgage (if applicable) or refinanced. The terms of this permanent financing depend on the completed project's value and income generation.
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### **Conclusion**
The commercial loan construction process involves careful planning, phased funding, and securing long-term financing. Understanding each step ensures that your project runs smoothly from start to finish.
For help navigating this process, **Atlantic Commercial Lending** is here to assist you with expert advice and financing solutions tailored to your needs. Reach out today!