Why Construction Loans Are Mostly Private Mortgages

“There Are Several Reasons Why A High Percentage Of Construction Loans Are Provided By Private Lenders”

It may comes as a surprise to here that most construction related loans for land acquisition, site development, building, and bridge financing come from private lenders.

The real truth of construction financing is that institutional lenders don’t really like them, but will provide them if they can secure the long term take out mortgage at the end of the project.

All construction projects come with a certain amount of risk, and institutional lenders are very risk averse and work to minimize risk when extending construction financing.

While the same risk exists for the private lender, the privates tend to each focus on certain types of construction in certain regional areas in order to more effectively manage the risk. This allows them to assess and approve construction loans more easily than a traditional lender.

For certain types of construction, especially residential homes in large urban areas, private lenders seldom require that a term loan be approved for the project prior to funding, providing greater flexibility to the borrower to shop around over a longer period of time for a construction take out mortgage.

Private mortgage lenders also tend to have less stringent draw administration requirements and a draw schedule that is more predictable in terms of the actual amount advanced compared to an institutional lender. Its not uncommon for a traditional lender to cut back a draw request based on a third party appraisers assessment of the work remaining regardless if its accurate or not, leaving the project scrambling for cash flow. And while this can happen with a private lender, the frequency is much lower and based on better logic for the most part.

While traditional lenders will claim to finance 75% of the construction costs, they won’t pay out a hold back allowance of from 10% to 15% of the approved loan amount unless the bank take out mortgage is utilized. With a private construction loan, the lender doesn’t tend to hold back more than 10% and the hold back amount is paid out at the end of the hold back period after the project is completed.

The key take away here is that cheaper money comes with more strings. Private mortgages for construction financing are more expensive than their institutional equivalent, but also tend to come with a lot more flexibility.

If you have a construction project you’re planning or are in the middle of where construction financing is required, give me a call so I can quickly assess your requires and provide relevant construction loan options we can go over together.

Click Here To Speak With Construction Mortgage Broker Joe Walsh