A construction mortgage approval is primarily based on three elements of the application: 1) project equity; 2) market strength and relevance; 3) exit strategy.
Depending on whether you’re working with a bank or private lending source, there are going to be other factors involved in the lender’s decision making process, but for the most part, the three elements above are going to be core to any construction mortgage financing application.
For project equity, each lender program will have a required amount of equity to be in the project before the lender is prepared to advance any funds. For instance, if the borrower or builder was looking to complete a construction project where the post construction value was $500,000 and the lender required an equity position of at least $100,000, then either the equity in the land at the time of construction needs to be worth $100,000 or the borrower’s initial investment into the project will need to cover the difference between initial property equity and the $100,000 equity requirement.
Market strength and relevance is all about making sure that the project has a pre-existing market for similar construction in the area where construction is taking place. Lenders are less interested in unique structural designs in remote areas than more conventional designs in well established areas.
The last core element is the exit strategy. For an institutional or bank lender considering a construction mortgage application for a single family dwelling, the take out mortgage for paying out the construction loan must be arranged and in place prior to the commencement of construction, providing a clear exit strategy to repay the construction loan. For a private lender, the exit strategy may be more about the strength of the resale market, that in the event of default, in completion, the lender is confident that the property can be sold under foreclosure in order to repay the construction loan and outstanding interest in full.
Having all these three elements in place at the time of application for a construction mortgage will greatly increase your chances of getting an approval for your project.
If you have a construction project you’re planning right now or are in the middle of, I suggest that you give me a call so we can go through your requirements together and review construction financing solutions that can meet your needs.