Construction to permanent loan financing essentially refers to the process of arranging a permanent loan or long term take out mortgage to pay out the construction loan at the end of the project.
Therefore, there are at lease two loans that have to be arranged. The first one is for the actual building construction and the second one is to finance the completed build or upgraded real estate holding.
For single unit construction financing, banks and institutional lenders will only offer construction loans if they are also provided with the long term take out mortgage at the end of the project. Because of this requirement, the property owner may get a great rate on construction financing, but will be limited to the bank or institutional lender’s options for a permanent loan which may or may not represent the best available rates and terms in the market for that borrower and property combination.
With smaller construction projects like single family homes, private mortgage lenders tend to be more flexible in that they don’t typically allow the long term or permanent loan to be arranged prior to them approving a construction loan and advancing funds against the project.
For larger commercial construction projects, banks and institutional lenders may still try to bundle their offering for the construction loan and the permanent loan together, but it is not typically a requirement that you have to get both from the same lender due to the larger level of competition of higher value commercial construction projects.
There are different schools of thought as to when a permanent loan needs to be arranged for the take out of a construction mortgage.
On the one hand, one can argue that getting the financing arranged as early on in the construction project as possible will eliminate any possibilities of delay which could impact the timing for paying out the construction mortgage at the end of the project.
On the other hand, there are those that can successfully argue as well that better permanent loan options can be available to you closer to the end of the construction project when the construction risk has been reduced and the finished project is taking shape. Lenders can be more aggressive towards providing financing quotations for well done projects that will carry strong market value going forward.
Because each project is somewhat unique in terms of both the construction financing requirement and the permanent loan requirement, it can make a great deal of sense to be working with a construction mortgage broker from the outset to make sure everything is seamlessly arranged between the two types of financing to avoid any delays or additional costs to the project/
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