While there is a variety of construction loans on offer, the process of underwriting a construction loan is essentially the same for all of them. In the following paragraphs we will walk you through this process for commercial construction loans.
Loan origination covers the entire cycle of obtaining a loan, from the initial application, through the review process, down to either the disbursal of funds or the application’s rejection.
Related: What to Review in Third-Party Inspection Reports
In order to reach a construction loan agreement, all related parties are put through a rigorous review by the bank. The review involves the borrower, the contractor, and the project itself, and goes into various aspects of their overall suitability for a loan, including the applicant’s reputation, technical expertise and financial standing. Let’s take a closer look into the review process.
Borrower Underwriting
As part of the application process, the borrower will be required to provide supporting documentation, which includes land appraisals, proof of paid taxes to date, mortgage records or a deed of trust, title insurance policy and title options, adequate liability insurance and any other required coverages. Additionally, further guarantees will be required, including loan agreements, takeout agreements, any tri-party agreements related to buying or selling, a completion bond (or, alternatively, a corporate bond), as well as inspection reports and reports on the project’s progress.
Contractor Underwriting
The process of reviewing the General Contractor will require a background check, including a review of their reputation, previous work records and experience, as well as financial statements. All of this required documentation serves to ensure the lender that the General Contractor, and any potential subcontractors have the capacity to bring the proposed project to a successful completion.
Project Underwriting
The techniques for the assessment of a construction project proposal are no different than those used in any other type of real estate. The key focus points in the review process are 1) the building plan, 2) the construction budget (including the analysis looking for any missing budget items and the overall assessment of how the project fits the budget), and 3) the appraisal report. It is important to note that the appraised collateral values are generally not met before the advancement of the funds and the completion of improvements.
The property owner, the developer and the lender (the bank) will enter a written agreement for the construction loan, specifying a detailed road map with the expected actions of all related parties for the entire course of construction.
Conclusion
Construction loan underwriting is a process that involves multiple individuals, detailed documentation and numerous steps. Lenders take a meticulous look at various aspects of the project and the applicants themselves, requiring tidy documentation and a strict adherence to the rules of the review process. The services of a construction loan admin will ensure that the process runs smoothly without missing any steps or wasting any time.
About Rabbet
Rabbet provides process automation software to mitigate risk in construction loans. By reading documents, coordinating approvals, and tracking payments, our software creates efficiencies and identifies opportunities to limit exposure for construction lenders and borrowers. Built in Austin, Contract Simply’s award-winning software cuts days from the construction back-office operations while ensuring compliance and reduced liability for everyone involved. Get started with a live demo today or check out our overview video.
Jump To
