“Regardless of The Type or Size of The Construction Project, One of the Crucial Elements For Success Is the Predictability of Your Construction Loan Draws”

The project management goal for any construction project is to manage well those things you can control and minimize the risk of the things you can’t directly control.

When it comes to construction loan draw management, the most important aspects of this process is knowing how much money will be advanced towards incurred construction costs and at what time.

Even if you manage everything in the project to the letter, there can still be draw cut backs and draw advance delays that are completely beyond your control and are more a function of the lender and how they administer the mortgage commitment.

If you choose an institutional lender, you may want to secure a contingency allowance incremental to the construction mortgage commitment from another lending  source or your own resources to project yourself from lender draw reductions which are not uncommon with institutional construction loans.

Another way to minimize draw risk is to select a private mortgage construction lender in situations where you can qualify for either an institutional or private mortgage construction loan.  Roughly 90% of construction loans are provided by private mortgage lenders anyway, partially due to the builder’s desire to secure a more predictable construction draw process, but mostly because institutional lenders are not interested in the risk associated with construction financing unless they are going to get a long term take out mortgage.

Its going to cost more money in terms of interest costs and lender fees for a private construction mortgage, but the draw process on average is more straight forward and more dependable in terms of what money will be advanced and when.

At the same time, with the renewed growth in construction projects and more private lenders entering the market, you also have to be selective when choosing private lenders if at all possible.

For some projects, depending on their type and location, the private lending sources may not be easy to come by and can result in you working with a lender that you perhaps don’t have any previous experience with and that also don’t have much of a track record in the market.

And with bigger projects where the draw amounts tend to be larger, privates can create delays with advancing money as they move their own money around to cover all the projects they are funding at any one time.

So the second risk management measure to reduce the negative impacts that can be associated with construction loan draws is lender selection. Make sure you spend some time initially with a new private lending source to make sure you’re completely comfortable with the way they come across and present their business. If you can’t get comfortable, its likely a sign of things to come. Also, make sure to do some background and reference checking where possible to see what others have experienced with respect to lender service and draw advancement.

Remember that private lenders in many cases are just one individual or a small group of individuals that are putting their money into construction projects and each individual or group will have their own way of doing things which can be good and bad for their customers.

Even before lender selection is broker selection as most private mortgage lenders place their money through a mortgage broker. So having an experienced construction mortgage broker working for you that has a pre-existing relationship with the construction mortgage lender provides you with another resource to help work through and follow up on draw management issues as well.

Click Here To Speak With Construction Mortgage Broker Joe Walsh

The post Construction Loan Draw Predictability first appeared on Ontario Construction Loans And Mortgage Financing.

“Here Is a Typical Construction Draw Schedule For a Residential Home Construction Project”

For most residential construction loans, the lender will agree to providing 4 separate loan advances or construction draws to cover off the cost of construction at specific points of completion.

• The first advance typically occurs after the foundation is completed which, on average, represents 15% of the total construction costs for the project. This is also referred to as the sub floor stage where excavation, foundation, and sub floor are all completed.

• The second advance is issued at what we call the lock up stage of the project where the walls, roof, windows and doors are in place and the project is completely closed up. This typically represents 40% complete.

• The third advance is issued at the drywall stage where all interior walls on the main floors have been installed and this represents approximately 70% complete.

• The fourth advance takes place at completion (98% to 100% complete). For larger projects, its not uncommon to see the draw schedule expand to 5 or 6 total advances to allow for better cash flow management.

Keep in mind that at all stages, the lender will only be prepared to cover off hard costs, and any soft costs incurred are deemed to be the responsibility of the borrower and are viewed by the lender as part of the borrower’s equity in the project.

Before the first draw is advanced, it is required that the borrower have clear title of the property, or in some cases a very small mortgage can still be in place. The construction mortgage will then be registered against the property, and the underlying equity in the property will further cover off the borrower’s equity requirement for the construction financing facility. If there isn’t sufficient equity in the property to meet the borrower’s requirement, the first draw advance will be reduced to allow for additional borrower investment in the project prior to the first draw advance.

For more information on how a loan advance process can be structured for your construction project, please give me a call and we can go through it together.

Click Here To Speak With Construction Mortgage Broker Joe Walsh

The post Construction Loan Draw Schedules first appeared on Ontario Construction Loans And Mortgage Financing.