With construction financing, especially for single family units or small commercial buildings, the age old questions with respect to construction financing is whether to try and secure a bank construction loan or a private mortgage for your project.
There are several pros and cons to consider, but for today, lets focus in on the key differences between these two main sources of construction financing.
Financing of any type from a bank or institutional lender is going to be the lowest cost available to you. But as low risk, low cost lenders, the qualifying process needs to be more involved, and the checks and balances involved in advancing funds can be considerable. To take advantage of bank related construction financing, you 1) need the time to go through the process and manage the draw administration and 2) have a back up source of funds to deal with any delays that can and do happen with draws getting advanced, and also to cover any shortfalls from draws being cut back or reduced.
Private mortgage construction financing is more based on the equity in the project, the marketability of the project, and the potential for a smooth and orderly payout at completion of work. Yes, the cost of funds is going to be higher, but if you don’t have the time to spend sourcing cheaper forms of money or have access to some type of contingency allowance, the lower cost money will likely end up costing you more in the long run anyway.
As a result, the majority of construction loans are from private mortgage lenders, even though the financing costs are higher.
Many builders, developers, and property owners view the added cost as a trade off for getting financing in place faster and having a more predictable draw schedule to deal with.
To be clear though, one type is not better than the other and the decision making process is not just about interest costs, but total project costs and selecting the source of construction financing that will allow the project to get completed within budget, in the time period you have to work with.
If you need a construction loan for a residential or commercial property, please give me a call and we can work through both your private and institutional construction financing options together.