How Construction Development Mortages Are Structured

“Construction Development Loans Tend To Follow a Certain Pattern For Approving Financing, Advancing Capital and Mortgage Repayment”

Its not uncommon for a real estate developer to want to secure sufficient capital to complete the total project.

While this may be the desired result, it tends to be impractical from the view point of a construction mortgage lender unless there is a substantial amount of real estate security offered.

Construction development projects are, for the most part, funded by private mortgage lenders in the form of individuals or private mortgage corporations.

The focus of the construction mortgage lender is going to be on how much is the property worth in its current state, and how many units of the development are pre sold?

As an example, lets say a developer has purchased a piece of property for $2,000,000 and has sunk $1,000,000 into road access for the initial sites that will be sold. The entire project include 100+ lots for development, but the initial development loan will likely be for no more than 65% of the current property value, or in this case, say 65% of $3,000,000.

This financing reality will cause the developer to break the project down into phases to fit within the money being provided. To get the project going faster, its not uncommon for the developer to sell a portion of lots to other builders to increase the available capital for their own development efforts within the project.

Construction mortgage funding is then approved for the initial phase of construction and mortgage funds are advanced on a  predetermined site development or lot build out schedule.

During the completion of Phase I, the mortgage is repaid as serviced lots are sold to other builders and completed living units are sold to consumers.

To start Phase II, the process basically repeats itself, based on a revised appraisal of the property remaining.

While developers would prefer to have a revolving line of credit that could be reused from one phase to the next, the private mortgage lenders tend to look at each phase independently. This means that for each new phase, the developer is going to have to pay a mortgage fee on closing of a new mortgage agreement for that particular phase as well as the monthly interest cost for the money that has been committed.

Depending on the lender, monthly interest charges can be based on funds being utilized or total funds committed, regardless if they have been advanced or not.

If you need assistance with a construction development financing requirement, I suggest you give me a call so we can review the requirements and go over the most relevant construction mortgage financing options available to you.

Click Here To Speak With Construction Mortgage Broker Joe Walsh