Laying the Foundation: Bank Requirements for Construction Loan Approval
Before the first excavator rolls, the bank checks the feasibility of your project with nearly 100% diligence. Comprehensive documentation is required for the approval of financing. This includes, in addition to the construction plans and building permit, a detailed calculation of construction costs.
A crucial factor is equity capital. Banks generally require an equity ratio of 20 to 30 percent of the total costs. This buffer serves as security and significantly reduces the financing risk for the lender. A higher equity share often leads to better interest conditions.
The bank requires a complete listing of all documents to assess creditworthiness and project quality. Self-employed individuals often have to submit the annual accounts from the last two years. A clean and complete submission accelerates the approval process by up to 3 weeks. A solidly prepared financial accounting in the construction company is the basis for this.
This initial documentation requirement sets the standard for the entire construction period, during which every progress must be documented.
The payment schedule: How money flows according to construction progress
The disbursement of the construction loan does not occur as a lump sum but in tranches corresponding to the actual construction progress. This approach gives the bank assurance that the funds are used for their intended purpose. The basis for this is often a detailed payment plan that aligns with the Broker and Developer Regulation (MaBV).
The MaBV stipulates which percentage shares of the loan amount are payable upon completion of certain trades. This ensures that payment is made only for completed services. A typical plan provides for the disbursement of up to seven partial payments.
Here is an example of a payment schedule according to MaBV:
- 30% after the start of earthworks
- 40% after the completion of the shell, including carpentry work
- 8% for the construction of roof surfaces and gutters
- 10% for window installation including glazing
- 12% after readiness for occupancy and against handover of possession
- 5% after complete completion
Strict adherence to this plan is crucial because if a construction phase is delayed, the bank will withhold the corresponding partial payment. A precise understanding of the workflow of the building phase helps to realistically plan these milestones.
To trigger these payments, indisputable proof of the respective construction status is essential.
The control instrument: The construction diary as evidence for lenders
The construction diary is much more than just a simple protocol – it is a central piece of evidence for the construction process. For architects and site managers, keeping a construction diary according to the Fee Structure for Architects and Engineers (HOAI) is often a contractual obligation. It transparently documents weather conditions, present personnel, performed work, and special occurrences.
For financing the construction phase, its role is critical: banks use the entries to verify the reported construction progress before they release the next loan tranche. A gap or unclear construction diary can delay disbursement by weeks and jeopardize the liquidity of the project. A digital construction diary that links photos with timestamps and GPS data provides over 90% more evidential strength than handwritten notes.
Platforms like Valoon enable the creation of legally secure construction reports directly via WhatsApp from the construction site. This data is immediately available in the office and can be processed as indisputable evidence for the lender. With a solid checklist for the construction phase you ensure that all relevant data is captured.
This precise documentation is the basis for effective cost control.
Keeping Costs Under Control: From Estimation to Active Management
A financially successful construction project requires more than just an initial cost estimate. Continuous cost control is essential to stay within budget. Planned target costs are systematically compared with the actual incurred costs.
This target-actual comparison allows deviations to be detected early – often even with an overspend of just 5%. Only in this way can you take countermeasures in time before small deviations lead to major budget problems. Cost control should be carried out at regular, short intervals, ideally weekly.
For effective cost control, the following documents are necessary:
- The original cost planning (cost calculation)
- All concluded work contracts
- Continuously updated invoices and payment receipts
- Forecasts for remaining costs
Many projects fail due to inadequate monitoring of expenditures, not because of an incorrect initial calculation. Professional controlling for large projects is therefore a necessity, not a luxury.
However, even the best cost control is put to the test by unforeseen changes.
Managing the Inevitable: Change Orders and Their Financial Consequences
Almost no construction project is completed exactly according to the original plan. Changes due to customer wishes or unforeseen circumstances are normal and lead to change orders. Change order management describes the process of capturing, assessing, and processing these changes.
A change order almost always has impacts on costs and deadlines. An unclear contractual basis or incomplete documentation of the change are the most common causes of disputes that not infrequently end up in court. Any change in services must therefore be documented immediately in writing and with all consequences.
This documentation is crucial not only for settlement with the client but also for the bank. Only with a clean proof of necessity and the costs of a change order will the bank adjust the financing accordingly. A missing receipt can lead to a financing gap of several thousand euros. The analysis of the risks in the construction industry shows that uncontrolled change order management is a top risk.
In addition to bank financing, public funds can also be an important pillar.
Utilizing government aid: Integrating KfW funding into financing
The KfW Bank (Kreditanstalt für Wiederaufbau) offers low-interest loans for construction projects that can be a valuable supplement to classic bank financing. Programs such as “Climate-Friendly New Construction” (Loan 297/298) are particularly relevant as they promote the construction of energy-efficient buildings with up to 150,000 euros per housing unit.
Accessing these funding options is tied to strict requirements. For example, the new construction must meet at least the Efficiency House Standard 40 and may not use fossil heating systems. Additionally, the application must be submitted before the construction begins.
Adherence to KfW standards must be accompanied and documented by an energy efficiency expert throughout the entire construction phase. These proofs are prerequisites for the disbursement of funding. An uninterrupted construction documentation supports this process and secures the additional financial resources. Combining various financing sources is an important part of the financing of large projects.
Ultimately, successful financing depends on the quality and availability of all relevant data.
Conclusion: Your Advantage with Valoon
Successful financing of the construction phase hinges on thorough, transparent, and legally secure documentation. Every construction progress, every cost item, and every plan change must be documented in a traceable manner to ensure timely disbursement of loan tranches and avoid costly conflicts. This is precisely where Valoon comes in.
With Valoon, your employees on the construction site can easily capture all relevant information via WhatsApp – from photos of construction progress to documented defects. This data is automatically archived securely and processed into meaningful construction reports. This way, you create the evidence your bank needs for smooth disbursement at the push of a button.
Secure your liquidity, save valuable time on administration, and regain control over your project finances.
Are you ready to simplify your construction processes and establish a solid foundation for your financing? Book your free demo now and discover how Valoon bridges the gap between the construction site, office, and bank.
More Links
Das Federal Statistical Office (Destatis) provides comprehensive information on construction prices and the real estate price index in Germany.
Das Federal Statistical Office (Destatis) answers frequently asked questions about the construction cost index.
Wikipedia offers a detailed article on the subject of real estate financing.
Die KfW (Kreditanstalt für Wiederaufbau) informs about its funding programs for private individuals in the area of new construction.
Die KfW (Kreditanstalt für Wiederaufbau) provides information on federal funding for efficient buildings.
Das Federal Ministry of Economics highlights the transformation of the construction industry through lightweight construction technologies.
Die German Federal Bank provides statistics on real estate and construction service prices.
Der Main Association of the German Construction Industry provides an overview of the construction industry in numerical figures for 2023.
Wikipedia explains the term construction time interest rates.
FAQ
Why is comprehensive documentation so important for financing the construction phase?
Banks only disburse loans against proof of construction progress. Thorough documentation with construction reports, photos, and invoices serves as indisputable evidence to ensure the planned disbursement of loan tranches and to avoid costly delays.
What does the Broker and Developer Regulation (MaBV) stipulate for disbursement?
The MaBV protects builders by stipulating that payments may only be made after actual performance has been rendered. It divides the construction process into up to seven sections and stipulates which percentage share of the total amount may be paid after the completion of each section.
How does Valoon help me communicate with the bank?
Valoon automates the creation of legally secure construction reports. The data collected on-site via WhatsApp (photos, texts, notes) is centrally gathered and can be processed as professional and credible proof of performance for the bank. This significantly accelerates the release of funds.
What is the difference between cost control and change order management?
Cost control monitors adherence to the original budget through a target-actual comparison. Change order management deals with the administration of costs and deadlines arising from changes to the original construction contract. Both are essential for stable financing.
How much equity do I need for construction financing?
Most banks expect you to cover at least the ancillary purchase costs (about 10-15% of the total costs) yourself. An equity ratio of 20-30% is ideal as it lowers the risk for the bank and secures you better interest conditions.
Can I combine KfW funding with a regular bank loan?
Yes, that is actually the usual way. KfW loans are often a component of the overall financing. You do not apply for these loans directly at the KfW, but through your house bank, which then forwards the funds. Compliance with KfW guidelines must be proven separately.
