LOAN PROGRAMS
ABOUT
CONSTRUCTION
A construction loan is a form of debt financing used to finance the development or rehabbing of all types of commercial real estate, as well as residential building projects with multiple homes.
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Construction loans can not only be used to pay for labor and materials, but these loans can also be used to pay for the acquisition of land or existing properties to be rehabbed.
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To obtain a construction loan, borrowers typically need to have some development experience.
Construction loans are usually funded by traditional financial institutions. Local and regional banks are particularly active construction lenders.
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Construction loans are short-term, higher interest rate financing. Once a project is completed, the loan will be paid off or replaced by a permanent loan.
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Typically, lenders want to see some form of pre-leasing or pre-sales rather than 100% speculative development.
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WHAT IS A CONSTRUCTION LOAN?
10 MUST-KNOW FINANCE TERMS
1.
Amortization
The process of paying the principal and interest on a loan through regularly scheduled installments.
2.
Balloon payment
A loan that involves small payments for a certain period of time and one large payment for the remaining principal balance, due at a time specified in the contract.
3.
Basis points (bps)
1/100th of 1% (0.01%), typically stated as a number of basis points over an index rate.
4.
Loan-to-value (LTV)
The ratio between the loan amount and the value of the property. The ratio is commonly expressed to a potential borrower as the percentage of value a lender is willing to finance.
5.
Lock-out period
A period of time after loan closing during which a borrower cannot prepay the loan.
6.
Non-conforming loan
A mortgage loan that does not conform to regulatory limits such as loan amount, loan-to-value ratio, and other characteristics.
7.
Recourse
A loan for which the borrower is personally liable for payment if the borrower defaults.
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8.
PITI
Principal, interest, taxes and insurance, the four components of a mortgage payment.
9.
Prepayment penalty
A penalty sometimes charged to a borrower who makes a prepayment.
10.
Replacement reserves
Monthly deposits that a lender may require a borrower to place in an account for future capital improvements of major building systems; i.e., HVAC, parking lot, carpets, roof, etc.