Construction Financing Sources

While most contractors are generally not directly involved with the financing of a construction project, understanding the process of financing and how it relates to a construction business is extremely important. The following outlines many of the most common sources for obtaining construction loans.

Commercial Banks:
Commercial Banks make single-family short-term and a limited number of long-term loans. They are generally the largest construction lenders on multifamily and commercial projects. They also make short-term loans to mortgage banks and to real estate investment trusts (REITs).

Savings and Loan Associations:
Savings and Loan associations are the largest of all lenders of both construction and permanent or long-term loans on single family housing. They also make a considerable number of construction loans for multifamily residences such as apartment houses and condominiums.

Mutual Savings Banks:
Mutual Savings Banks are generally located within the northeastern United States. Their mortgage investments are generally concentrated in single family permanent mortgages. They tend to make only a limited number of construction loans, but do make long-term loans to mortgage bankers and to real estate investment trusts which in turn make construction loans.

Mortgage Banking Companies:
Mortgage Banking companies make a significant number of loans for construction and land development but are mainly intermediaries between borrowers and lenders.

Life Insurance Companies:
Life insurance companies do a minimum amount of temporary construction lending. Their principle commitments are long-term loans on commercial and multifamily projects.

Real Estate Investment Trusts:
These trusts provide long-term mortgages on commercial and multifamily projects and a limited amount of construction loans.

Government Agencies:
Approximately every sixth house built in the United States is financed by the GI loan program. The Veterans Administration (VA) makes construction loans on housing for veterans, their dependents, and other beneficiaries of deceased veterans. The Federal Housing Administration (FHA) insures mortgage loans made by approved lending institutions, however, FHA does not lend money.

Other Sources for Loans:
Finally, miscellaneous sources of loans which should not be overlooked include individuals, syndicates, service organizations, and Community Housing Authorities.

Lenders need assurance that a contractor is financially responsible, of good character and reputation, and able to carry out the work stipulated in the specifications and construction documents.

A full financial statement from the contractor stating his or her assets and liabilities, investments, property owned, life insurance and other pertinent information, including a credit report is generally requested by the lender. In addition, a complete set of drawings, plans, and specifications as well as the names of all the subcontractors and their specific tasks are also generally required.

Finally, the lender appraises the site of construction and compares it with the contractor’s final cost estimate. Once this is in place, the lender submits the application to the loan committee for approval.