Village Real Estate

Archive for the ‘Construction Loan’ Category

It would seem that construction activity is still fairly high based upon the number of calls that I get from people about construction loans. There are a lot of calls from people just getting started, as well as from a number of seasoned “construction veterans.” In a large number of those calls, I hear some common questions. So I thought that I’d answer a few of them here.

Q: How do construction loans work?

A: In general, just like every other loan. You sign loan documents and money is funded into escrow. In the case of a construction loan, only a portion of the total loan is released. The balance is released either in preset “stages” or as workers complete portions of the project according to a budget. The former is called a “draw” system and the latter is called a “voucher” system.

Q: How are the payments calculated and who makes them?”

A: Commercial loans have the added security of an income producing property providing the funds to pay the loan payments. For residential loans, it’s the borrower’s income. When a property is being built, there is no secondary source of repayment so the burden of payment would normally fall to the borrower. But lenders didn’t want borrowers to use up all of their funds in case something went wrong with the project, so they created “interest reserves.” This is a chunk of money set aside in the loan to do nothing but make the loan payments during the construction process. The payment is based upon how much money has actually been used or “drawn” at the time the payment is due. This is not the case for private money lenders. They calculate interest on the entire amount of the loan from the initial funding date.

Q: What’s a contingency reserve?

A: This is another chunk of money set aside in the loan to protect you against cost overruns. Since it can take a year or more to complete a project, the prices used to estimate the construction budget become less accurate as time marches on. The contingency reserve is released a little bit at a time during the construction process to cover inevitable price increases.

Q: How do you calculate the maximum construction loan?

A: The maximum construction loan is based upon many factors: Property type, stabilized value at completion, total costs, and equity invested to name a few of the key concerns. For any given property type, there is usually a maximum “loan to costs” and a maximum “loan to value.” The key is this: The largest permanent loan for which the property can qualify, assuming it is built and fully occupied or valued, will limit the construction loan. This is because the construction lender wants to be paid off at the end of construction and the way to do that is with a permanent loan. This does not mean that if the permanent loan exceeds the total costs of the project that you can get 100% construction financing. Just about every lender is going to look for 10% to 20% of the total costs to be funded by equity or cash from the borrower.

I hope that these few examples clarify some of the questions that you might have concerning construction lending. I’ll cover more here in the future. If you should have a question that wasn’t covered, email me at your convenience and I’ll do my best to give you a complete answer.

USA Construction Loan

 

The USA construction loan market has become a rather complex place over the course of the past several months.  Indeed, when it comes to construction financing, most experts predict that the challenges that are faction the typical construction lender and contractor or developer alike are certain to continue into at least the immediately future.

 

The most significant issue facing the USA construction loan market today is a serious reduction in the amount of construction financing that is available on the market today.  Therefore, if you are interested in obtaining construction financing, you need to make sure that you have all of your proverbial ducks in a row.  You need to make sure that you have the best possible credit rating and history before you dive into the USA construction loan market. 

 

Equally important, when it comes to construction financing in these difficult economic times, you need to make certain that you can readily demonstrate to a construction lender that your particular project will bring in revenue sufficient to deal with the construction financing that you desire to obtain.  At this point in history you really do need to make certain that you can demonstrate appropriate financial wherewithal in regard to your construction project.

 The USA construction loan market has become a rather complex place over the course of the past several months.  Indeed, when it comes to construction financing, most experts predict that the challenges that are faction the typical construction lender and contractor or developer alike are certain to continue into at least the immediately future.

http://www.businessfinancebroker.com

 

Financing Land in California

California Land Loan Overview:

The intent of this article is to get you thinking in the right direction so you know what kind of California land to buy and what you can reasonably expect as you get started in the process of dealing with a land lender in California.

California Land Financing Budget (Example):

Land Purchase Price ?$300,000?Land Purchase Price

Soft Cost of Construction ?$ 40,000?Plans and Permits

Hard Cost of Construction ?$350,000?Construction Costs

Closing Costs ?$ 22,000?Fees, Title, and Escrow.

5% Misc. Reserve ?$ 17,500?5% of Construction Costs

Loan Interest Reserve ?$ 35,000?Interest On Amount Drawn

Total Building Cost ?$764,500?

Appraised Value ?$800,000?Estimated Value of Land with Building Completed

Down Payment ?$191,125?25% of $764,500

Benefits of California Land Lenders

Loan officers dealing with California land should be able to assist you with the following information:

1.?Assessment of the estimated yearly taxes, insurances, and HOA fees.

2.?Approximate interest rate for the loan.

3.?Down payment required.

4.?Interpretation of your personal financial statements, credit scores, and income-to-debt ratios to conclude your eligibility.

Utilities Lead to the Path of Finance

One important thing to consider as you look to buy California land is utilities. When construction developers go into the construction stage to build new homes in Southern California then roads and utilities are built for a large number of homes. When the lender knows that a lot has public road access and utilities nearby they are often more willing to supply financing for the land because there is a foreseeable capacity to build on it which increase the California real estate worth and lowers the risk to the lender. The cost of installing utilities on a lot is not considered part of the hard construction costs for building.

Land Loans from a California Lender’s POV

California land loans are more risky to lenders than residential loans. The reason for this is that normally most people do not live on the land they buy since it’s vacant. As a result it is industry practice to not consider land a primary residence until something is built, and so it follows that vacant land is called investment property even if a person intends to build on it in the near future. Also, vacant land is called commercial property in California, that is property used for an investment purpose, even if the land is zoned residential and there are plans in place to build a primary residence. The importance of this categorization for lenders is that their risk increases on lending for land because a person can walk away from a land loan easier than a loan on a primary residence since the borrower has another place to live hypothetically.

Lenders for land will expect more from a borrow than on a residential home loan. There is a larger down payment expected typically than a California residential house or condo. There is more preparatory work expected also. Lenders may expect the borrower or buyer to bring a variety of items to the lender’s table for a construction loan. Here is a partial list of potential requirements some lender’s stipulate in order to obtain a land loan:

1.?Complete and permissible architectural drawings for what will be built on the land.

2.?Detailed time tables for all aspects of construction.

3.?Finalized realistic budget for the building.

4.?Supervisory chart, including a list of builder contact information for contractors and the architect assigned.

5.?Proof of bonded and insured builders and contractors.

Here is a list of the paperwork required from a borrower to get started on a land loan in California:

•?Last 2 years of your federal income tax statements.

•?Last 2 months of pay stubs for both you and your spouse with contact information.

•?Your property information if you currently own including tax statements, HOA statements, any current mortgage statements, and any other debt statements you currently have.

•?Any additional proof of income streams, including child support, trust fund, investment income, dividends, interest, rental income, social security or government monies.

•?A complete list of your bank accounts and documentation, including all your checking, savings, money markets, and banking information.

Conclusion: Some Negatives and Positives

One draw back is that the courts of law in California have less regulations to protect the interests of land buyers than they provide to California residential home buyers since a land purchase is considered an investment. On the positive side, land is like having a clean slate of property. California land buyers have a much easier time when it comes to planning what they want to build, as long as the building plans live up to the regulations and zoning requirements of the city for the land’s location. As a land buyer CA you also have much more flexibility on getting what you want than doing a residential home remodel for example. The best part of all about obtaining a loan to buy land in California is that it forces you to think through the land buying process ahead of time, talk to the right people which you will need to help you build a new home in Southern California and make a financial budget with sensible deadlines so that ultimately you can become a true player in the future development of a community for all to see. Plus you will have a really cool story about your personal experience in the timeless process of building on California land.