Whether its a residential or commercial project, for larger structures, especially ones with multi units that will be sold at the end of construction, the process for arranging a construction mortgage loan can get pretty involved and time consuming.
Similar to most types of business financing, the borrower or builder always assumes that the process will be relatively quick and that the lender will be able to interpret their information easily and be flexible with their requirements in order to render a decision in the borrower or builder’s favor.
And similar to most other types of financing, that assumption is almost always false.
There are a number of reasons for this.
First, even though mortgage lenders are fond of larger scale projects because of the financing fees they can earn, they are all very particular as to what they want to see in place prior to first providing a commitment and second, actually advancing any funds.
And the cheaper the source of money, the larger the requirements put forward by the lender.
Second, the underwriters that review your deal are people, but also individuals with their own learning and assessing styles. The larger and more complex the project, the more likely it will challenge human comprehension to some degree, causing more explanation and support over a longer period of time.
Third, the project doesn’t just happen over night. So, when you start the process earlier, with the “RIGHT” lender profile for your project and requirements, you are providing the lender with the opportunity to get to know you, get to know how you operate, and to see the project planning stage evolve before lender funds are required. This relationship building can make or break any deal. And like any relationship, it takes time to develop one where someone is prepared to act in your favor, especially if you are border line on some of the requirements.
Fourth, even though you may feel you understand what a construction financing source will require, there is no guarantee they will agree with what you provide to them as being sufficient for their lending guidelines. For instance, say that you’re building a commercial condo project and have the 60% level of presales that a construction lender requires. But when you go to provide the support for the sales, the lender reduces the total to 40%, based on how they verify presales, leaving you well outside of the stated requirements. The more time you have in advance to deal with this, the more likely you’re going to be able to figure out how to get the appropriate documentation in the lenders hands in order to get a working commitment for construction mortgage financing.
All of this is a balance in that you also need to be far enough along with the project planning to get someone to take a serious look at it. Weak or thin information in the early stages will not get you an audience with a decision maker, nor inspire any confidence.