Construction loans are basically provided from three mortgage lender classifications and three mortgage registration positions, each impacting the risk to the lender and rate to the borrower.
In terms of mortgage lender classification for construction loans, there are the major banks, secondary banks, and private lenders.
The major banks tend to own the institutional construction financing in larger centers for residential and commercial properties as they will finance these deals at 2 to 3 percent over the prime rate.
The secondary banks and credit unions will provide more construction financing in more rural or less prime market area where the major banks have less interest and will provide construction mortgages more in the prime plus 4% to 6% range.
The third category, which is also the largest category for construction loans, is private mortgage lenders. Private lenders will provide construction loans for 8% to 10% on both residential and commercial properties.
These rates, which can still vary outside of the ranges mentioned, are related to a first mortgage position on the property.
Institutional lenders do not typically provide construction mortgage financing in a second position on a property unless the first mortgage is very small in relation to the value of the property prior to construction. But when a construction loan is issued in a second position, the construction loan rate is going to go up by approximately 2% on average.
The same is true of private mortgage construction loans in that the higher the mortgage registration position, the higher the interest rate on the construction loan. And unlike institutional construction mortgages, many private construction loans are registered in a second position against the title of the property after the land or site acquisition mortgage. In some cases where the equity is high enough and the overall project considered to be well suited for a strong real estate market, the private mortgage lender may even consent to providing a construction loan registered in a third position on title.
Similar to the institutional construction financing requirements, a second mortgage position on a private construction mortgage will command an interest rate increase of approximately 2% from what would be offered in a first mortgage position and a construction mortgage provided in third security position may command an interest rate increase of 4% to 8% above what would be charged for a first mortgage registration against the subject property.
Remember that these are only general guidelines you can apply to get a feel for what certain lenders and mortgage registration positions will charge and that the actual rates will vary by lender and construction project.
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