Construction loan options are typically provided by “A” credit institutional banks or credit unions, or private mortgage lenders.
There is very little sub prime institutional lenders participating in most mortgage applications seeking construction financing.
Lets take a brief look at the two primary sources of construction mortgages.
Like most mortgage products provided by institutional lenders, construction financing funded through banks, credit unions, and trust companies, come at the lowest interest rates available on the market.
And like other forms of institutional credit, the approval process can be quite involved and can take some time to complete.
Cheaper money is more patient money for the most part, so you need to have some time to invest in the application process.
Construction loans from banks also have fairly high qualifying standards and typically do not provide funding higher than 65% of the construction costs or the post completion appraisal value, whichever is the lower.
Draw authorization can also be very conservative as assessments are made at each draw stage as to the outstanding work remaining to complete the project. If the remaining work is deemed to be higher in cost than a required draw, the draw will be cut back requiring other funding to be available to pay the bills and keep the project on track.
Private Mortgage Lenders
While private lenders will charge higher rates and may have fees required on closing, they also offer higher potential leverage (percentage of project costs that can be financed), a faster loan application assessment process, and more predictable draw funding.
The benefits out weigh the costs to such an extent that in the province of Ontario, approximately 75% of construction mortgages for land acquisition, development, and building are issued from private sources.
This has also attracted large pools of private capital as the nature of construction, especially residential construction, allows capital to be recycled into more than one project per year, providing a very healthy return on investment to private mortgage lenders.
Long term take out mortgages are provided by institutional lenders where there can be a large cross section of mortgage programs to choose from depending on the project type, size, location, and credit profile of the borrower.
Even within the private mortgage category, there can be many potential variations to terms and conditions provided in available construction mortgage offerings, so assistance from a qualified mortgage broker can become quite important in figuring out the best option to choose for a given project.
If you’d like to better understand your construction loan options for either an existing project or one being planned, I recommend that you give me a call so that I can quickly assess your situation and requirements and provide relevant construction financing options for your consideration.