7 Need to Know Answers to the Most FAQs about Commercial Construction Loans

Person reviewing drawing plans for a condominium complex with a pen and calculator in hand

When you need construction financing for a new project, it may be hard to know where to start. You know you have found the perfect commercial property, but what happens next? More importantly, how do you know what commercial lenders to use for your commercial construction loans?

At Diversified Funding Incorporated, we are a private money lender that is dedicated to helping our clients secure the funding they need. We want to make sure that when you come to us for construction financing, you understand your options. Today’s blog post will take a look at the most commonly asked questions we get about commercial construction loans.

1. What Are Construction Loans?

Construction loans are for more than just commercial property purchases. You can use a construction loan to fund single-family homes, condominiums, retail stores, office buildings, and more. Banks do not often provide this type of funding and terms that private money lenders can with commercial construction loans.

It is important to note that construction loans are short-term loans—usually one year or less. Short-term loans give your project a quick influx of cash before long-term funding is found or available.

2. What Are the Different Construction Loan Types?

There are two different types of construction loans: construction-to-permanent and stand-alone.

A construction-to-permanent loan covers the construction and turns into a permanent mortgage after construction is complete.

Stand-alone construction loans only include the construction costs. They do not turn into a permanent mortgage. Therefore, you must seek additional funding to secure a permanent mortgage.

3. How Does Construction Financing Work?

Most construction financing works similarly—you present your project, and the commercial lenders respond with a proposed deal. At Diversified Funding Incorporated, we keep our construction financing process straightforward and simple. Since we are not a bank, we have more flexibility to get creative with our construction loans.

When you reach out to us about your construction project, our first step is always a conversation with our team.

  • First, you discuss your project and present details to our real estate professionals.
  • Next, we assess your project and use our 45 years of experience to develop a deal that works for us as construction lenders, and you, the property owner.
  • Finally, once we decide to move forward with your project, we help you gather all of the necessary information we need to make a final deal and get you the funds you need.

4. Why Would I Take a Commercial Construction Loan?

Most traditional banks do not deal with short-term commercial construction loans. Also, banks take longer to get you access to the funds that you need. Commercial construction loans are most helpful when you need a quick influx of cash for your real estate project, and you have met all of the lender requirements (which we will discuss later).

5. What Are Typical Interest Rates for Construction Loans?

It is hard to determine typical rates on construction loans because interest rates vary based on the commercial lender, property, location, your construction plan, and your personal finances. To determine what the typical interest rate is in your area, reach out to local construction lenders and request a project review and proposed interest rate. 

6. What Are the Fees of a Construction Loan?

Every construction loan has different terms, but there are standard fees associated with a construction loan. These include closing costs, loan insurance, early repayment fees, and administrative fees. Make sure you ask about the potential fees involved before taking on a commercial construction loan.

7. What Are the Borrower Requirements?

Since commercial construction loans do not come from a bank, your private money lender may request additional information about your project. Here are the most common points about your project that a construction lender will look at:

  • Personal financial situation and credit score
  • Down payment available
  • Experience as a property owner and developer
  • Detailed project plan
  • Choice of contractors and other vendors
  • Project feasibility

Planning your project out in as much detail as possible will help with the entire borrowing process. A developed plan will show your prospective lender that you have prepared for and plan to succeed in your real estate venture.

Are You Looking for Commercial Construction Loans?

Located in Boston, MA, Diversified Funding Incorporated can help you secure funding for your next real estate project. With over 45 years of lending experience, we specialize in secured real estate loans across New England. Get the construction financing you need with a commercial construction loan from DFI.

For a private money lender you can trust, and access to resources you can count on, contact us today!