How do Construction Loans Work?
If you’re interested in building your own property, be it residential or commercial, you’ll no doubt wonder how to obtain financing for this real estate endeavor. The fact of the matter is, when you build, it means having to work with a variety of people to get from concept to completion. Even when financing a traditional single family home, that’s also the case, it just isn’t as complex as commercial construction loans. Either way, there’s often a lot of confusion surrounding both residential and commercial construction loans. So, let’s look into what’s actually involved.

How do Construction Loans Work?

Many people wonder how construction loans work. This is because the vast majority of those entering the market do so as buyers -- not developers. But, there is a niche in new construction as it provides many solutions resales cannot. 

For instance, a resale might need significant repairs and improvements to be suitable for their future purposes. This means older homes and commercial buildings need an extensive inspection to assess what’s needed. And, that can often be cost prohibitive, given the age of the property. So, construction is a more realistic alternative. 

But, most people just don’t have the cash to build, whether it is for a residential home or a commercial building. Here’s an overview of how construction loans work:

  • Choose a lender. Of course, construction typically requires financing and therefore a lender is necessary. But, which entities actually provide commercial construction loans? Well, in the past, commercial construction loans were only provided by regional and local lenders. The reason for this were prohibited regulations and because those regional and local banks knew the local market. But now, there are far more choices. However, regional and local banks still make up the most of the construction loan industry.
  • Apply for the right financing. Financing construction is different than resale because there isn’t any property history. Short-term financing is typically the starting point, which then transitions to long-term financing or a take-out loan. The former provides funding from the initial construction until the building units start leasing to tenants. Then, long-term or permanent financing comes into play. Thereafter, the two loans are combined into “mini-perm” financing. A mini-perm loan generally carries a shorter term than traditional long-term financing but, it amortizes the short-term financing. This gives the property time to establish a property history -- something that did not exist previously.


As you can see, construction loans are somewhat complex but are often necessary to supply funding for building new properties.
For help getting a Construction Loan in Texas please see http://www.proactivelendinggroup.com

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