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What Are Ground-Up Construction Loans?

There are many types of properties to develop in Texas. The process of developing real estate starts with finding the ideal property or project. Then, you need strong, reliable financial partners to help your projects become a reality.

As construction costs continue to increase, it’s more important than ever to have financing in place to cover all facets of development, including land purchases, materials, insurance, and labor.   

Ground-up construction loans are the ideal solution for businesses in need of financing for their real estate development projects from start to finish. We will further explain why.

How Does a Ground-Up Construction Loan Work? 

Essentially, construction loans are streamlined financing solutions that allow developers to borrow construction funds to pay for building materials, labor, and the land itself. These loans can be used to build single family homes, multi-family units, and mixed-use development projects, including office parks and retail centers.

Construction loans differ from traditional loans in several key ways: 

– Unlike traditional mortgages, commercial construction loans offer short loan terms, typically for a period of 12-18 months, depending on construction plans.

– The application and approval process is far more thorough, requiring a review of architectural plans, construction timelines, and line-item budgets for each phase of development.

– Once approved for a construction loan, funds are not disbursed in a lump sum. Rather, disbursements are made through a loan draw process, similar to a line of credit.

Subsequent payments are made directly to builders through a series of construction draws based on the completed stages of development. These may require an inspector evaluation before the construction draws are processed.

– For most construction loans, borrowers pay interest on funds as they are drawn and not on the entire loan amount.

– Once construction is complete, loans can be converted into a traditional mortgage to simplify the repayment process. 

What Are the Qualifications for a Ground-Up Construction Loan?

Borrowers must meet several qualifications in order to be approved for a construction loan, which can help secure larger loan amounts as well as more favorable interest rates.    

– Good to excellent credit. Borrowers need to have a minimum credit score of 680. The ideal credit score is at least 720 to increase your chances of approval. Banks need to see a positive credit history of timely payments to minimize their risk. If necessary, borrowers should work to improve their credit history and raise their score before applying for construction funds. NOTE: Actual credit scores required for approval will vary depending on the requirements of the particular creditor.

– Ample and steady income. Banks need proof of ample and steady income to cover payments both on existing debts as well as new construction loans. Borrowers will be asked to provide pay stubs, bank financial statements, or other financial documentation demonstrating annual income.

– Low debt-to-income ratio. A borrower’s debt-to-income ratio (DTI) is a comparison of all monthly debt payments to gross monthly income. The lower the DTI, the more cash should theoretically be available to make construction loan payments each month. Lenders typically require a DTI ratio of no higher than 43% when approving construction loans, but this may vary depending on the requirements of the particular creditor.

– Down payment of at least 20%. Borrowers are typically required to make a down payment of at least 20% when taking out a commercial construction loan. However, many lenders require a down payment of between 25% and 30% of the total construction costs. 

– Project details and construction budget approval. Construction projects come with many uncertainties and variables such as labor delays, zoning and permit approvals, and rising construction costs.

Because of these issues, lenders ask to see as many details and plans as possible for proposed construction. These include the following:

  • Deeds or purchase offers for land
  • Completed blueprints and building specifications
  • Detailed line-item budgets
  • Construction draw schedules
  • Signed construction contracts with change order provisions

– Builder or general contractor approval. Borrowers will need to provide proof that architects and builders are qualified, licensed, and insured. This may involve providing copies of the builder’s insurance certificates, resume, and proof of financial stability. Applicants should also provide a clear description of each party’s responsibilities.

Why Texas Gulf Bank Is the Best Lender Choice

Texas Gulf Bank is the ideal choice for ground-up construction loans because of our commitment to excellence, dedication to customers, and expertise in developing commercial loan solutions that meet the needs of each real estate development project.

Our experienced commercial loan officers will help you throughout the construction loan application process by:

  • Reviewing all construction loan options.
  • Identifying the best possible interest rates and repayment plans available.
  • Creating a financial strategy that works with your construction goals and budget.   

We strive to provide excellent service – from promptly reviewing all requested documentation to funding construction draws as soon as possible. Borrowers can expect to obtain peace of mind that they will have the financial resources needed to meet deadlines and complete construction in a timely manner.

All loans subject to credit approval.

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