If you are doing any type of renovation or remodeling work, make sure you borrow money for a long enough period of time. Always estimate on the high end for your expenses, and be sure to add into your loan request the money you will need for interest expenses, taxes, insurance, and utilities during the remodeling period. You do not have to hide them somewhere by, for example, doubling your estimate for painting expenses. Commercial lenders expect to see those holding costs included in your loan request. In addition, avoid being too optimistic about how long it will take to complete your work and sell the house. Give yourself some leeway. Lenders like conservative, careful borrowers.
Several things about a commercial loan are different from the home loan of your experiences. The most significant ones are explained as follows.
Commercial loans usually require more paperwork and expenses. You might be required to produce a survey showing boundary lines and all improvements, an Environmental Questionnaire, a Phase I Environmental Report, architectural drawings, and proof of builder’s risk and liability insurance, not just property insurance. The lender might require you to hire a third-party general contractor rather than supervising the work yourself. The title insurance requirements might include many things that will make the policy more expensive. Some out-of-state commercial lenders use out-of-state law firms for the closing documents, which could lead to attorney’s fees dramatically higher than those you might have had in previous experiences.
Always ask each potential lender for a copy of its checklist for the closing attorney, the names of the attorneys it generally uses, and an estimate of the total fees. This will tell you who uses local talent, who uses inexpensive attorneys, and who has a long list of requirements that might cost you time, trouble, and money.
Make sure you understand the interest rate and how often the rate will change. Home loan rates might change once or twice a year. Commercial loan rates will change rates every time the index, the reference point, changes.
Find out what fees you will be expected to pay. This could include an origination fee equal to 0.5%–1% of the loan, plus disbursement or inspection fees. In other words, the lender might require an independent third party to provide regular progress reports of your remodeling or repairs. The fee can be several hundred dollars per inspection. You might have to pay a fee every time the lender advances money to you to pay bills. Knowing that, you might want to draw down loan money once a month instead of four times a week, every time a bill comes in the mail.
Ask about the draw schedule if you are borrowing money for renovations or repairs. One lender might limit you to once-a-month checks. Another could have a specific schedule, such as “30% of the loan will be disbursed when all the rough carpentry, electrical, and plumbing has been completed, and not before.” Some require you to pay part of every bill presented to the lender. If the month’s construction bills total $4,000, the lender might disburse $3,200 (80%) and you must come up with the other $800 from your personal funds.
Do not let any of this scare you. I do not know of a single lender who does every one of these things, and some do not do any of them. You just have to shop wisely instead of being surprised after you sign on the dotted line.