Top Features to Compare Before Choosing Construction Loan Lenders

Construction Loans at a Glance

Construction loans are distinct in that funds get released during specific stages, and borrowers are typically only responsible for interest-only payments on drawn funds during construction.

When it comes to repayment, it depends on whether you have a construction-only loan or a construction-to-permanent loan, which transitions into a permanent mortgage as the project is completed.

Given these nuances, it’s essential for borrowers to work with commercial construction loan lenders that have experience and can be the right financing partner.

Construction Lending Experience

When a business pursues a construction project, it’s unique to their vision and specifications, and is based on what’s best for their business. In other words, every project is unique.

Construction loans are more hands-on, dealing with inspections and different draw periods where funds are released after certain milestones.

Not all construction lending experience is the same. When comparing commercial construction loan lenders, make sure they have verifiable experience in your industry and type of project.

Eligibility Requirements and Underwriting Criteria

Commercial construction loan lenders set their own eligibility requirements and underwriting criteria. As a borrower, it’s key to evaluate these standards to ensure you qualify for financing.

Lenders may have:

• Minimum credit score requirements
• Annual revenue requirements
• Time in business requirements
• Specific thresholds for loan-to-cost (LTC) or loan-to-value (LTV)

• Debt service coverage ratio (DSCR)/debt-to-income ratio (DTI) limits

They typically want to see supporting documentation as well. These can include blueprints, construction plans, agreements with a licensed general contractor, financial statements, tax returns, project timeline, and budget estimates.

Draw Schedules and Fund Disbursement Process

Commercial construction loans are very different from a conventional mortgage or term loan. You don’t receive a lump sum to pay for costs.

Instead, the loan funds are managed by the lender and released based on specific predetermined milestones. These stages are referred to as “draws” and may require inspections to make sure funds are being allocated correctly.

When comparing commercial construction loan lenders, make sure you understand the draw schedules and fund disbursement process. Each lender may have a different process and timeline.

If a draw approval takes longer with a lender, it could impact the entire project’s estimated timeline, leading to delays. Having a lender that processes these requests in a timely manner can help you stay on schedule, so you can continue to pay your contractors, purchase building materials, and keep things moving on time.

Loan Amounts, Terms, and Financing Options

Commercial construction loan lenders have different offerings. When comparing construction loan lenders, look at:

• Minimum loan amount
• Maximum loan amount
• Down payment requirements
• Cash reserve requirements
• Loan types available, such as new construction loans and renovation loans

• Short-term loan options vs. long-term loan options, such as construction-only, compared to construction-to-permanent financing with a one-time close

• Loan-to-cost (LTC) and loan-to-value (LTV) ratios

Repayment Options and Loan Flexibility

Getting the funding you need is just one part of the process. Making sure you can afford to pay back the loan is crucial.

Typically, commercial construction loan lenders allow borrowers to make interest-only payments while the property is under construction. Plus, interest is typically only charged on the amount drawn at that time, instead of the full loan amount. This can be immensely helpful when cash flow is tight and you’re dealing with a major project on your hands.

With a construction-only loan, the remaining balance is typically due when the project is complete. It’s key to understand the repayment options and structure. With a construction-only loan, you may need to make a balloon payment to satisfy the loan or refinance and have another closing.

Construction-to-permanent loans can be an attractive option because they have one closing, and transition from interest-only during construction to a longer repayment term and monthly payments afterward.

You also want to understand if the loan has any flexibility. Construction projects have many moving parts and could have supply chain, permit, or weather-related delays, or unexpected costs.

Some lenders may provide extensions or other options to help you navigate any challenges that may arise. Some questions to ask include:

• When does repayment start?
• Are payments interest-only during construction?
• Are there options if there are project delays?
• What options are available if I need more time or funds?

Approval and Funding Speeds

The approval and funding speeds that commercial construction loan lenders offer are critical to keeping projects on schedule. Any delays in financing could push back timelines, including payment to contractors or purchasing building materials, or getting the necessary permits.

Business owners should look beyond interest rates and advertised loan products. Instead, do a deeper dive into each lender’s potential approval and funding timelines.

Every lender and project is different, so every lender may have different timelines for reviewing and processing loan applications, underwriting, getting appraisals in order, and completing closing.

Also, check how long it takes for funds to become available after the closing process and if there’s a set draw schedule.

Some commercial construction loan lenders may have an online portal to streamline communication or have a relationship manager to be your point of contact. Working with a lender that is efficient, timely, and communicative may help avoid costly delays.

Closing Costs and Total Cost of Borrowing

When you compare construction loan lenders, it’s easy to focus mostly on the interest rates advertised and how they’ll impact how much you owe. But it’s only a part of the equation.

You want to understand the closing costs and the total cost of borrowing. There may be administrative or other types of fees that add to the cost of the loan. For example, some lenders may charge origination fees for processing the loan, appraisal, or inspection fees. You may not have to pay an application fee, but there are likely other fees to be aware of that impact how much you’ll repay over time.

Customer Service

While there are various construction loan lenders out there, you want a financing partner that you can rely on. That means having customer service options available if there are any problems down the line.

Check for phone, email, live chat, and online portal support. See if there are dedicated loan specialists who can offer expertise and assistance.

To take a step further, you can also check out customer reviews and ratings. Go to the Better Business Bureau (BBB), Trustpilot, and social media to hear about others’ experiences.

Final Thoughts

Getting a construction loan can help you turn your vision into reality and support the growth of your business. However, they can be nuanced and complicated loan products that require extra diligence and care.

When you’re on the market for construction financing, do your research and look beyond rates and review the big picture. Construction loan lenders can vary widely, and finding the right option will make your life and the project easier from the start.

Ideally, you have a financing partner that is an expert in your industry and familiar with projects like yours who can hold your hand throughout the process. In the best situation, lenders can help facilitate the project and keep it moving, instead of contributing to delays.

Just be sure to understand the loan types and repayment options going in, so once the property is built, you know what’s next.