Before you whip out a pen and sign on the dotted line on the sign back of your construction mortgage commitment, make sure that you have read through all the requirements, conditions, and mortgage program specifics.
Construction loans can have some very prickly rules that may not always be apparent on the surface, but can catch up with you later on in the project. The mechanics of how any construction mortgage will be administeredshould be clearly understood before accepting any offered funding, even if everything appears to meet your requirements on the surface.
For instance, its almost impossible to meet the conditions of an institutional construction loan if there is an existing mortgage on the project. The equity ratios that are required to be in place at each draw stage can be next to impossible to satisfy based on the lender’s own commissioned third party appraisals.
Even when there isn’t a mortgage in place on the property, institutional draws can be reduced by the results of the third party appraiser who is focused on valuating the remaining work on the project. So even if you’ve completed everything outlined for a particular draw that was agreed to by the lender prior to construction starting, you can still get your draw cut back based on the manner in which they assess work completion outlined in your mortgage documents.
Most institutional lenders will take this type of approach. You are not going to be able to change it, but you’re going to need to be prepared to work with it if you sign up. And the only way to really work with it is to get absolutely everything done that is required for each draw stage, AND have a source of additional funds to draw on if the construction draw request gets cut back for any reason.
Other examples of things to pay close attention to in the mortgage documents would be costs that may not be covered, such as any form of sales taxes, and the manner in which the hold back process is managed in terms of the amount of hold back set aside and the requirements for paying out the hold back at the end of the project.
If you’ve starting the process for locating and securing construction financing, or are in the process of considering potential offers, give me a call so I can quickly assess your requirements and situation and then provide you with fully explained construction financing options for your consideration.