“Make Sure You Fully Understand The Construction Loan Draw Conditions Before Committing To A Construction
Financing Agreement”

Perhaps the most important aspect of any construction loan commitment is the conditions attached to construction draws and the process for construction draws to be approved and advanced.

One can argue that this is even more important that the cost of funds as a construction project that doesn’t have a predictable source of capital is going to be incurring all sorts of costs in the form of late fees, delay costs, contract default charges, and so on.

This is where its going to be real important to read the fine print on your construction loan commitment documents before you sign them.

If you aren’t comfortable with the draw related conditions, then don’t sign and either negotiate better terms or find another source of funding.

To help you better understand the issue, the construction draw parameters written into construction mortgage commitments can range from a set amount that will be released upon a given level of completion, to a process where by each draw request will need to be audited to make sure that enough funds are held back to cover off what a third party appraiser indicates is left to complete on the project.

In the first example, the amount for each construction advance is known and clear, while on the second example, each draw can be adjusted according to the interpretation of the work completed by a third party appraiser.

Another example is when on construction loan provider will advance the funds for any costs related to the project, where the next lender will not advance funds to pay for the HST to suppliers. If you’re not aware of the latter, you can end up scrambling to locate an extra 13% of the costs to complete the full payments and keep everyone working on the job.

Bank or institutional lenders can get bogged down with their own administration process at times which can delay the issuance of a draw advance. Private lenders tend to be more predictable in terms of the amount that will be advanced at a given stage, and the timing for issuance of payment.

Cheaper sources of money typically will have a more strict draw management and administration process which can mean that you might have to have access to some form of reserve funds if there are any delays or unexpected draw reductions.

The bottom line is make sure you understand the draw conditions that the lender will impose as early in the application process as possible so you’re not wasting any time talking to the wrong sources of construction financing, while avoiding any potentially disastrous surprises that can result from being unaware of certain conditions you signed off on.

The best solution for dealing with this situation is to work with a construction mortgage broker who can not only direct you to sources of construction financing that meet your requirements, but also proactively explain the pluses and minuses of each lenders draw management process.

Click Here To Speak With Construction Mortgage Broker Joe Walsh