How to Use Construction Loans Successfully

Depending on the type of business you wish to operate, there’s a possibility that you may need a construction loan to proceed. While construction loans can be just what you need to make your business dream into a reality, you have to know how to utilize them to their full potential. Oftentimes, the best way to get the most out of a service or product is to know how it works in the first place.

The Loan Submission Request

The best place to turn for a construction loan is a local bank or lender, where they often have the most reliable idea of how your regional market operates, which gives bankers and lenders a better perspective of your situation when compared to other financial institutions. That being said, you still have the option of seeking out funding from other financial institutions should you feel going local isn’t the best fit for you.

Combination Lending

Something else you should know about construction loans is they’re a blend of two types of financing: long-term permanent financing and short-term financing. The balance between the two loan types is achieved by shortening the terms of standard long-term financing and structuring it for a construction project. The combination also gives the borrower the option of refinancing the short-term loan into one with a longer long-term in the future.

The Underwriting Process

Just like any other loan, a construction loan has to go through the underwriting process where the plan is either accepted or rejected. To increase your chances of your project being approved, you’ll need to make sure you have a stellar construction budget, sufficient financial backing and a development team that’s well-suited for the project. It’s also best that you only apply for construction loans when market conditions are at their most favorable. Documents you’ll need to have on hand include:

  • Financial statements
  • Tax returns
  • Project estimates
  • Complete project plans
  • Contingency plans and liabilities


Before you start celebrating when you reach the closing phase, know that there’s still a lot of work to do. Be prepared to submit a substantial amount of documentation. Be sure to use any checklists you receive as guides, and turn to a legal professional should you have any questions. Once the loan has closed and you’ve been fully approved, realize that you’ll receive your loan in monthly installments rather than a lump sum, so plan your project accordingly, and work closely with your developer.

Construction loans are financing of a different breed, but turning to experienced professionals and doing your homework beforehand is sure to make the entire process easier and your construction project a success.

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