Letter-of-Credit: An Alternative Solution to a Gap Loan Commitment

As an option to a space loan dedication, construction loan providers will often accept a letter-of-credit when it comes to distinction in the 2 loan amounts. Again, the caveat that is same here regarding previous approval of this proposed letter-of-credit journalist by the construction loan provider.

A letter-of-credit is dedication often granted by a commercial bank saying that the called celebration – in this situation, the construction lender – may phone upon the lender to finance all or area of the line of credit stated into the letter-of-credit at that time period that the letter-of-credit is with in effect.

Example: If construction loan provider Scenic Check nationwide Bank held a letter-of-credit for $400,000 through the Hoard nationwide Bank, and in case it had been legitimate through the readiness associated with the Barracks home construction loan, then Scenic Check nationwide Bank can use the letter-of-credit funds to cover down their stability staying following the Payno Claims Life Insurance business funded their base quantity.

Various other circumstances, specially where in fact the construction loan provider has an incredibly high viewpoint of this borrower and also the development, the construction loan provider may elect to finance through the gap, i.e., shoot the gap, and fund the entire loan quantity – including the gap portion – without requiring a space loan dedication, letter-of-credit, etc. Read the rest of this entry