The fact is you can’t get a loan unless you apply, so of course the application is the first part of the process. And you can’t apply unless you know which loan you should apply for.
The variety of loan types can be overwhelming, so you may want to talk over your options with your experts.
The short of it however, is that development projects require two loans, a construction loan for building the project and a permanent loan to take out the construction loan. When you purchase an existing building you only need a permanent loan. A construction loan is an interest-only, interim loan with payback due within about 12-36 months. A permanent loan is a fully amortizing loan (whereby principal and interest are paid down to zero) lasting 10-30 years. Both are available for anywhere from 75%-90% of the value of the project, so in many cases, expect on putting some money down.
The loan process consists of the borrower sending the lender an application and the lender either refusing or accepting the terms and offering a commitment based on the amount of risk involved. The lender uses the application to evaluate the borrower’s financial status in regard to his ability to pay back the loan and the investment’s worth in regard to its ability to recover the mortgage debt if foreclosed upon and sold.
The loan application, not surprisingly, is detailed and often complicated. You may want to have your attorney review it. The application normally include sections on the loan request specifications, project plans, borrower financial statements, project financial projections and current and projected leasing information. You will want to be absolutely truthful in filling out the application. This is because; misrepresentation has effects on a loan application and is a felony.
A letter addressed to the lender will be included to outline information such as project legal description, application deadline, borrower’s legal identity and name, project reference and file number, proposed security, application data sheet, proposed loan guarantees, conditions and terms, proposed application fee, commitment fee, pre-closing conditions, broker’s roles, fees, and responsibilities, proposed closing conditions, lender receipt, borrower representations, date and borrower’s signature among other details deemed relevant.
It is to be noted at this juncture that applying for a loan to finance your real estate investment is not an easy task. Not an easy task in the sense that it consists of lots of obligation from borrower’s part. You are therefore, strongly advised to consult your attorney for legal advise and an explanation as to what the loan you are about applying for entails.
By Jackie Fraser