Commercial Construction Loan Requirements Explained
In last month’s edition of Credit Matters, you learned how Commercial Construction Loans could drive business and foster growth for your Credit Union. This month, we will cover common requirements for companies to qualify for a construction loan.
What Are the Requirements for a Construction Loan?
Commercial construction loan requirements vary from lender to lender, but here are some of the most common construction loan requirements:
Good Credit Score
Applicants need an excellent credit history to qualify for a construction loan. Since construction loans are typically large amounts, lenders look for low-risk borrowers with high credit scores. Business owners will normally need a credit score in the high 600s at the very least.
Low Debt-To-Income Ratio
As with any loan, a common construction loan requirement is a low debt-to-income ratio. Usually, lenders prefer a debt-to-income ratio of under 40%. Calculating debt-to-income ratio is simple with this formula:
Total Monthly Debt Payments / Gross Monthly Income = Debt-to-Income Ratio
Sufficient collateral is essential so that the lender will secure its investment if the business defaults on the loan. Acceptable collateral might include assets like equipment, accounts receivables, or other property.
High Debt Service Coverage Ratio
A business’ debt service coverage ratio (DSCR) is also evaluated in the loan decision process. DSCR tells lenders how much income a business generates annually as a percentage of its debt servicing costs. A high number indicates a business has enough income to cover its debts. To calculate DSCR, use this formula:
Net Operating Income / Current Annual Debt Obligations = Debt Service Coverage Ratio
A Qualified Builder
When applying for a construction loan, a business should have identified a qualified builder for the project. This typically means finding a builder who has verifiable completed projects and is a member of a reputable general contractor association.
Detailed Construction Plan
Many lenders require a detailed construction plan during the loan approval process. This can include blueprints, floorplans, specifications, timelines, and more. Suppliers, materials, and labor costs may also be required details.
Current Profit and Loss Statements and Income Tax Returns
Additional construction loan requirements usually include a business’ current income tax returns and profit and loss statements. Lenders want to ensure a company is in compliance with tax laws, is operating profitably, and all payments are current.
A large down payment is another common construction loan requirement. The average down payment requirement ranges between 10-35% of the total project cost depending upon the specific lender.
These were the most common construction loan requirements. Specific requirements may vary based on your chosen lender.
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Extensia / AVANA Capital is a leading lender that can offer borrowers commercial construction loans with flexible terms. Our commercial construction loans only require 10-20% down payments, and we even offer interest-only payments for the first two years. Our mission is to serve business owners by providing fast and reliable financing.