Wichita Construction Financing

Secure construction financing and pre-qualification with TDL Construction in Wichita. Trust our expertise to streamline your construction process.

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Lionheart Outfitting LLC
Lionheart Outfitting LLC
January 3, 2024
Wichita's TDL Construction team is very professional and knowledgeable about the construction and remodeling process. I have worked with them on a few projects, and they show integrity and commitment to delivering quality workmanship every time. They are dedicated to improving their community and the construction industry.
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Chantal Hayes
December 22, 2023
TDL Construction does great work! They’ve done some electrical and plumbing work for us. We couldn’t be happier with our experience with them! We’ve seen some of the remodeling they’ve done and we will have them back to do some remodeling for us. We look forward to working with them again in the near future!
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Kristine Heinz
December 14, 2023
I have had fantastic experiences with TDL Construction. They respond promptly to inquiries, deliver estimates quickly and present themselves professionally when they are working with clients. I'm very impressed with their work ethic. It's not unusual to see the owners of the company on a jobsite after hours and on the weekend to make sure the project is running smoothly. If you're looking for a company with passion, work ethic and honesty, give TDL a call!

Pre-Qualify Now: Your Construction Financing Roadmap

Discover construction loan steps, necessary paperwork, and pre-qualification tips for optimal rates in our detailed guide for contractors, developers, and Homeowners.

Commercial Construction Financing Paperwork

Construction Financing Introduction

Construction financing is an essential part of any real estate development project. It involves securing funds to cover the costs of constructing or renovating a property. Before a lender will approve a construction loan, borrowers typically go through a pre-qualification process to determine if they meet the lender’s requirements.

The pre-qualification process allows lenders to review the financial strength and viability of the project. It gives lenders confidence that the borrower has the means and experience to successfully complete the project. Going through pre-qualification upfront can save time down the road by avoiding issues that could delay closing the loan.

Construction financing comes with its own unique requirements compared to other types of real estate loans. The funds are administered in phases based on the progress of construction. This helps mitigate the lender’s risk. Pre-qualification allows the lender to verify that the borrower understands the intricacies of this type of financing.

Types of Construction Loans

There are several types of financing options for construction projects:

Land Acquisition Loans

Land acquisition loans allow developers to purchase land for future construction projects. These loans provide funds to buy vacant land and prepare it for development by clearing it, installing roads and utilities, and zoning it for the intended use. Land loans are usually interest-only loans, with the principal paid back after the development is completed and sold or rented. This allows the developer to buy and hold land for future projects without tying up large amounts of capital.

Construction Loans

Construction loans provide financing for building projects. The funds pay for labor, materials, permits, and other costs during the construction phase. These loans generally only cover hard costs directly related to construction, not soft costs like architectural plans. The loan disbursements are tied to the progress of the project, with funds released as certain milestones are reached. This minimizes risk for the lender. Construction loans are usually interest-only during the building phase, with the principal paid back once the project is completed.

Bridge Loans

Bridge loans provide short-term financing to fill a gap during construction projects. For example, a bridge loan may cover the process of obtaining permanent financing for a project. Or it may provide funds if a construction loan runs out before the project is finished. Bridge loans are relatively high-interest, short-term loans designed to bridge a temporary financing need. The loans are paid back once permanent financing or the next phase of financing kicks in. Bridge loans help developers avoid halting projects due to running out of capital in the midst of construction.

Pre-Qualification Process

The pre-qualification process is a critical first step when seeking construction financing. This involves submitting detailed documentation to the lender so they can assess the risk of the project and the borrower’s ability to repay the loan.

Key items that lenders will request include:

  • Financial statements – Minimum of last 3 years of financial statements for the borrower’s business and personal financial statements. This gives the lender insight into the financial health, cash flow, and assets/liabilities.

  • Project plans & details – Detailed budget showing all costs, documentation on the project specifications, blueprints and designs, timeline with milestones, information on permits and licensing. This allows the lender to understand the scope and feasibility of the project.

  • License info – Copies of required licenses such as contractor’s license, business licenses, and professional certifications. This verifies qualifications to complete the work.

  • Personal credit reports – Personal credit reports of all owners/guarantors. Lenders want to see a strong credit history.

  • Proof of equity investment – Documentation showing the borrower’s equity contribution to the project. Lenders want to see the borrower has “skin in the game.”

  • References/portfolio – References, examples of past completed projects, and a portfolio demonstrating experience successfully managing similar projects. This reduces perceived risk.

Thoroughly preparing these items is vital for securing construction financing. It demonstrates to the lender you and your project are worth the risk. Taking time on the pre-qualification sets the stage for smooth financing and project execution.

Financial Ratios

Lenders will assess several financial ratios as part of the pre-qualification process for construction financing. Two key ratios they examine closely are the debt service coverage ratio and the loan to value ratio.

The debt service coverage ratio (DSCR) measures the borrower’s ability to service their current debts. It is calculated by dividing the net operating income by the total debt service. A higher ratio indicates the borrower will be more capable of making their loan payments. Many lenders look for a DSCR of at least 1.20 or higher.

The loan to value (LTV) ratio compares the amount of the loan to the appraised value of the project. It is calculated by dividing the loan amount by the appraised value. A lower LTV ratio signals less risk for the lender. Typical LTV requirements fall within the range of 65-80% for construction projects.

Lenders will assess the borrower’s historical financial ratios. They want to see stable and strong ratios over time. This provides confidence the borrower can manage their debts and has the capacity to successfully repay the construction loan.

Loan Terms

Construction loans have unique terms compared to other types of financing. This includes interest rates, fees, loan-to-cost ratios, and draw schedules.

When it comes to interest rates, construction loans typically carry a higher rate than conventional mortgages. This accounts for the increased risk during the building phase. Interest rates can be variable or fixed depending on the lender. Variable rates fluctuate over the course of the project while fixed rates remain the same.

In addition to interest, lenders also charge fees for processing, underwriting, and originating the construction loan. These fees are usually between 1-3% of the total loan amount. It’s important to understand these costs when budgeting for the project.

The loan-to-cost ratio refers to the percentage of total construction costs covered by the loan. A ratio of 80% is common, meaning the borrower must cover the remaining 20% with a downpayment. Some lenders may offer loan-to-cost ratios up to 90%. Higher ratios mean less money required upfront but also higher monthly payments.

Draw schedules outline the timing and conditions for loan disbursements. Rather than receiving the full loan amount upfront, funds are issued in installments as work is completed. This schedule is tied to inspections verifying progress. Draws are usually monthly or quarterly during the building phase. 10% of the loan is often held back until final occupancy.

Understanding these key loan terms helps set proper expectations when seeking construction financing. Doing research and comparing options from multiple lenders ensures a loan structured favorably.

Construction Financing Collateral

Construction loans typically require collateral to secure the financing. The collateral helps protect the lender if the borrower defaults on the loan. Common types of collateral for construction loans include:

Liens – The lender will place a lien on the property being constructed. This gives the lender a security interest in the property. If the borrower defaults, the lender can foreclose and take ownership of the property. The lien ensures the lender will get repaid even if the project fails.

Personal Guarantees – Lenders will often require personal guarantees from the principals of the development company. This makes the business owners personally responsible for repaying the loan if the company defaults. It provides additional motivation for the borrowers to complete the project successfully.

Performance and Payment Bonds – Lenders may require the general contractor to obtain performance and payment bonds. These bonds guarantee the contractor will finish the project and pay subcontractors. If the contractor fails to perform, the bonding company steps in to remedy the default. This protects the lender from risks related to contractor performance.

Properly securing a construction loan is crucial. The lender will carefully assess the available collateral to ensure adequate protection in case of default. Strong collateral reduces lending risks.

Permitting & Construction Financing

Before any construction financing can be approved, all necessary permits must be obtained from the relevant government authorities. This includes building permits, zoning permits, environmental permits, or any other permissions required for the proposed construction project.

Lenders will require proof that the proper permits are in place before they will release any loan funds. They want to ensure the project is fully compliant with local regulations and codes. Having permits approved also demonstrates the project is viable and ready to break ground.

Some key tips for handling permitting:

  • Apply for permits as early as possible, as the approval process can take weeks or months depending on the jurisdiction. Don’t wait until you need financing.

  • Work closely with local zoning officials and inspectors to ensure you understand all permit requirements for your specific project.

  • Hire experienced contractors and architects who are familiar with local permitting rules and can help navigate the process efficiently.

  • Be sure to obtain all necessary approvals at the federal, state, and local levels. Different permits may be needed from different agencies.

  • If permits are rejected or delayed, work proactively with officials to understand reasons and make revisions to get approved.

  • Provide the lender with official approved copies of all major permits before closing on construction financing.

Having permits in place shows the lending institution that your project is ready for funding. Don’t leave permitting to the last minute, as it can derail your financing timeline if issues come up. Stay in close contact with local authorities and address any concerns early. Proper due diligence with permitting makes the overall financing process smoother.

Inspections

Construction loans typically require periodic site inspections by the lender or a third-party inspector to verify progress before approving each draw request. These inspections serve as a control point for the lender to confirm work completed matches the draw request submitted by the borrower.

The lender will outline an inspection schedule, often with a site visit required before the first draw and then every 30-60 days thereafter. Inspectors will take photos, verify contractor invoices, and confirm adherence to plans and specs. The inspection reports are submitted back to the lender to approve release of the draw funds.

If the inspection uncovers issues such as work not being completed according to schedule, the lender may delay funding until satisfactory resolution. Therefore, borrowers should review inspection reports closely and quickly address any identified concerns. Maintaining an open dialogue with inspectors and the lender can help keep the construction draw process running smoothly.

Challenges

Construction projects often face difficulties that can lead to increased costs and delays. Three of the main challenges are:

Cost overruns – Many construction projects go over budget due to unexpected costs. Changes in material prices, permitting issues, design changes, weather delays, and other factors can all contribute to expenses that exceed original estimates. Careful planning and cost contingency can help, but cost overruns are a risk.

Delays – Missed deadlines are common in construction for reasons like weather, manpower issues, material shortages, and permitting delays. Delays mean loss of potential revenue for the project owner. They also often lead to increased costs. Managing the timeline realistically and building in contingencies can help minimize delays.

Contractor disputes – Disagreements between property owners and contractors about payment, work quality, and other issues can lead to disputes. These may result in work stoppages or legal action. Clear contracts, open communication, and fair business practices help avoid disputes. But they remain an issue on some projects.

Tips for Success

Construction projects often run into trouble when budgets are unrealistic, contractors are unreliable, or adequate contingencies are not in place. Here are some tips for ensuring a smooth financing and construction process:

  • Create realistic budgets. Be conservative with your budget estimates, get multiple bids for each trade, and pad expenses by at least 10% to account for unexpected costs. An accurate budget will help ensure you qualify for adequate financing.

  • Hire a qualified general contractor. Don’t just go with the lowest bidder. Look for contractors with a solid reputation for delivering projects on-time and on-budget. Check their references thoroughly. A reliable GC is essential.

  • Include contingencies. Have at least 10% set aside for unforeseen expenses, delays, or cost overruns. Construction projects often have unexpected problems arise, so adequate contingencies can prevent budget shortfalls.

  • Maintain reserves. Even after factoring in contingencies, it’s wise to have extra reserves available through your own capital, lines of credit, or access to additional financing. This provides a safety net if expenses exceed estimates.

  • Get experienced advisors. Work with a knowledgeable construction lawyer and an accountant familiar with contractor financing. Their expertise can help avoid pitfalls.

  • Be conservative with loan amounts. Don’t maximize your borrowing capacity. Only borrow what you truly need, so you have some cushion within the approved financing amount.

Following these tips will help ensure you get quality workmanship on-budget. A realistic plan and reliable team are key to successfully financing construction.

F.A.Q: Construction Financing

At TDL Construction, we understand that construction financing can seem daunting. Our team is here to guide you through the process, providing clear and honest answers to your questions. We believe in building trust with our clients by prioritizing transparent communication and working towards the successful completion of your construction project.

What is construction financing, and how does it work?

Construction financing is a specialized funding method for construction projects. It involves obtaining a loan that is disbursed in stages as the project progresses. This ensures that funds are available at each milestone, reducing financial strain and optimizing construction progress.

How do I determine how much construction financing I need?

To determine the amount of construction financing you’ll need, you’ll need to estimate the project’s total cost, including materials, labor, permits, and contingency funds. Consulting with a construction professional and creating a comprehensive cost estimate will help you accurately assess your financing needs.

What factors do lenders consider when assessing my eligibility for construction financing?

Lenders typically consider factors such as credit history, income, financial stability, and the project’s viability when assessing your eligibility for construction financing. Maintaining a good credit score, stable income, and a healthy debt-to-income ratio will increase your chances of securing favorable financing terms.

What is the repayment structure for construction financing?

The repayment structure for construction financing varies depending on the terms of the loan. Typically, the loan is disbursed in stages tied to project milestones, and interest accumulates only on the portion of the loan that has been disbursed. After the construction is complete, the loan typically transitions into a traditional mortgage.

How can I find a reputable construction financing partner?

Finding a reputable construction financing partner is crucial to the success of your project. Look for a lender with experience in construction financing, a track record of transparent and reliable service, and a commitment to understanding your unique needs. Seek recommendations from trusted professionals in the construction industry, and conduct thorough research before making your decision.

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