Texas New Construction Loans
There are many reasons business owners take out commercial construction loans. As your business grows, you may need to make expansions and improvements that typically come at a high cost. Many businesses are not able to handle the financial obligation of expansion by paying up front. In these circumstances, a commercial construction loan can be beneficial.
Reasons You may Consider a Commercial Construction Loan
A commercial mortgage is for business owners who want to purchase existing property. Those who want to renovate existing office space will need to apply for a commercial loan, and individuals who want to build a new office space from the ground up may also want to apply for a commercial loan.
It can cost thousands to millions of dollars to construct a new building or administer renovations. Many businesses that are still growing probably won’t have the cash to make payments up front, which is when s commercial loan can be helpful. A commercial construction loan pays for land development, labor, and materials throughout the construction process.
How do These Loans Work?
Commercial loans differ from other loans. With most loans, the full amount will be disbursed up front in one lump sum. When the borrower receives the funds, he or she is then responsible for making scheduled payments over a certain period of time. Many commercial loans have a repayment period of at least 10 years.
A commercial construction loan does not disburse the full amount of the loan up front. The lender and borrower will work with each other to establish a draw schedule. As the construction project reaches new developments and milestones, partial amounts of the loans will be released. An example may include the first draw taking place at the clearing of the land with the second draw taking place when the foundation is set. In most circumstances, the lender will have an inspector visit the construction site to confirm that the milestone is completed.
Furthermore, you only pay the interest on the loan proceeds that have been disbursed with a commercial construction loan. For instance, if your total loan is $500,000 with only $100,000 dispersed, then you will only pay interest on $100,000.
After the project is completed and the remainder of the loan is due, a borrower can choose to apply for a commercial mortgage. This is an alternative to making one large payment when the project if done.
A down payment is usually required because a commercial construction loan is a high-risk loan. A down payment will take some of the risk off of the lender. In most circumstances, a down payment will cost about 10%=30% of the entire project.
What Qualifies for a Commercial Construction Loan in Texas?
There are several factors that must be considered to determine eligibility for a commercial construction loan in Texas. Typically, borrowers will need to have high-credit scores because commercial construction loans are high-risk. Although credit requirements will vary from lender to lender, many borrowers will need to have a credit score that is at least in the upper 600s.
Another factor that will be considered is debt-to-income ratio. This will show the relationship between your income and the debt of the business, which is usually calculated on a month-to-month bases. Most lenders will look for an income ratio that is no higher than 43%.
When you are applying for a commercial construction loan, you will need to show the lender project plans. This may include a plan of the designs and specs of the project. You may also need to show your estimated project cost, which includes materials, contractor fees, and mother expenses.