If you’re looking to secure a construction loan for a project you’re in the middle of, or one you’re planning to proceed with, then you’re going to need to decide if you’ll be working with a private or bank lending source.
With construction, private lending is not automatically considered a secondary choice as their are features and benefits to a private mortgage related to construction that are not always present with a bank or conventionally funded mortgage.
The first thing to look at is the existing financing, if any, that is on the property where construction will take place.
If you have a bank mortgage in place right now in first position at a good rate you may want to leave that in place and proceed with a second mortgage for construction financing.
In this particular situation, you options will be almost exclusively limited to private lending options as banks do not provide construction loans in a second mortgage position.
This is one of the main reasons that borrowers opt for a private mortgage on construction as the weighted average cost of capital on their first mortgage and a private second may be better than the total costs of refinancing everything into one new first mortgage.
The bank construction financing option is going to be the lowest stated cost of financing, but also the most conservative in terms of financing amount, financing commitment, and draw administration.
If you want to take advantage of the potential lower cost of bank financing for a construction project, you’re going to need to be offering first position security to the lender, have enough lead time to work through the application process, be able to be approved for a long term take out mortgage prior to construction, and have a contingency allowance available to you if there are any delays in draw advances or reductions in draw amounts.
While many types of private loans are targeted to people with bad credit, in the construction financing market, private mortgages are more about the speed of getting something in place that can sit in a second mortgage position, and the greater predictability in the draw advance schedule, providing true value for a higher cost.
From a financing point of view, the options related to each project can be somewhat unique, and at times difficult to figure out.
One of the best ways to work through both bank and private construction lending options is to work with a construction mortgage broker that deals with both types of lenders.
By taking this approach, you can not only get access to the most relevant options, but have some expertise available to you to compare and contrast the different choices available to you.
If you require assistance in this regard, then I recommend that you give me a call and we’ll go over your situation and requirements together.