There are those of us who are faced with the shortage of funds for carrying out construction projects. It does not matter whether the construction is meant for commercial purposes or for residential use. Commercial construction financing is a very simple process that can be sorted out; all you need to do is taking four minutes of your time to apply for credit.
Someone will underwrite your construction loan after you are done with the application process. In this article, I will take you through the process of underwriting construction loans. Your application is first evaluated using the profit test. This test is used to evaluate the worth of the completed project in relation to the costs incurred during construction.
There is also the Loan-to-Value Ratio, which evaluates if the construction loan will be lower than seventy five percent of the building’s value. There are those lenders who disregard this test and give out loans that have a higher ratio. If the funds availed to you are not sufficient to finance the project, you can apply for the mezzanine loan.
Most of the commercial lenders do not have faith in appraisals. They prefer to use the Loan-to-Cost Ratio to determine what percentage of the project’s total cost they are being asked to cover.
In the past, the applicant was expected to raise a minimum of twenty percent of the total cost before they were deemed eligible for credit application. The twenty percent was to be presented as the site on which the commercial development was to take place. This was a means of determining that the applicant was committed to the cause.
Today, the financers cover up to ninety percent of the construction costs. In the event that the loan offered is not enough to see the project through, the developer can apply for additional funds along the lines of mezzanine funding.
The other test that the underwriter takes is to determine whether the completed project will be able to qualify for a take out loan that is large enough to offset the construction loan. They do this by calculating the Debt Service Coverage Ratio. For a project to pass this test, it must have a ratio higher than one point two five. This can be translated into net income that is twenty five percent more than your installments.
Net-Worth-to-Loan-Size Ratio is the final test. This test will determine whether the net worth of the overall project is equivalent if not more than the loan being offered.