Reliable real estate companies look forward to building housing apartments to their customers’ exact specifications. However, these corporate enterprises soon find out that undertaking the projects is expensive. They need a considerable amount of upfront cash to pay for a variety of expenses. These costs include purchasing the vacant land, registering it, arranging for the necessary equipment, materials, and labor. They even have to keep some money aside to meet certain unforeseen contingencies. Many of these companies conduct their business operations on a tight cash flow. They might not have the internal funds to finance the housing projects. In this situation, the companies should opt for construction loans.
What exactly is a construction loan?
A construction loan is a financial scheme in which commercial banks offer real estate companies of all sizes. The money from the scheme pays for the cost these corporate enterprises incur on their housing projects. It covers the expenses related to buying the land, obtaining its registration permit, and drafting the plans. The funds of this loan even pay for the operating costs the companies incur for undertaking the projects. These include arranging the necessary heavy equipment, acquiring the material, and hiring the labor.
Real estate companies need to fulfill the following eligibility criteria to obtain a construction loan from commercial banks:
- These corporate enterprises should have a strong credit history and a credit score exceeding 680,
- Provide a down payment equivalent to at least 20% of the loan amount their lender sanctions,
- Prove they have sufficient cash flow to pay for the principal and interest amount within the specified period,
- Provide necessary financial documents proving yearly debt payments is less than 45% of operating income,
- Submit audited financial statements indicating the projected construction budget, including all the provisions for cost escalations,
- Provide certified copies of land deeds, architect’s blueprints for construction projects, trade license, and other relevant documents, and
- Fill up the forms the institutional lenders provide for sanctioning the loan.
How does the loan scheme work?
Real estate companies fulfilling the necessary eligibility requirements can easily apply for a construction loan. They can then use the funds from this leading scheme to finance their customers’ housing projects. Many of these corporate enterprises might be building the houses on land already in their possession. In this case, they can use the equity on this land to cover the down payments on the loan. Moreover, their institutional lenders will appoint an expert review of the progress of work on the housing project. The financiers will only release the necessary funds after obtaining a satisfactory report. This helps the banks to cover the risks they incur when sanctioning the loan to these companies.
Opting for a construction loan from a commercial bank helps real estate companies finance their housing projects effectively. They get the necessary funds to complete the construction of their customers’ houses within specific deadlines. This eases the pressure on their cash flow position, and they have enough money to conduct their business activities. However, the institutional lender they choose should be reliable. The interest rate and other expenses the financier charges for sanctioning the loan should be reasonable for them to accept.