A construction mortgage, especially one from a private lender, is less concerned about the long term viability of the project or even who’s going to be the owner at project end, and more concerned about the market valuation of the project and borrower or builder equity investment.
The construction mortgage down payment can be in the form of cash or other security offered as collateral to the project. The amount of borrower investment can vary considerably by project, location, and lender, especially when you’re looking at commercial construction loans.
At the most aggressive end of the spectrum, construction mortgage lenders will tend to want to see a solid equity investment of at least 20% of the project costs. If most of the investment needs to come from cash injected into the deal, the down payment against the property will have to be completed prior to the first draw being advanced. Under this scenario, the goal of the borrower is to complete the work required to get to the first draw on budget so that the lender will start to advance funds from that point forward.
When there is substantial equity in the construction property or there is other property offered as security, the construction lender may be prepared to advance funds to cover the initial costs of the project. In some cases, the lender may even go so far as to advance 100% of the construction costs if the equity in the secondary property security is large enough.
But without a strong equity position either in real estate pledged for security or cash invested in the project to date, its unlikely that a construction mortgage applicant will be able to secure a mortgage commitment or any advances against one that is approved.
With larger scale projects where the equity portion is not sufficient to secure enough construction loan funding, the borrower will look to mezzanine funding sources to provide the additional equity for a share in the return of the overall project.
If you are in need of a construction mortgage for a project you’re planning or one you’re in the middle of, please give me a call so I can quickly assess your requirements and provide relevant construction mortgage financing options for your consideration.