Unlike a traditional mortgage, a construction loan registered as a mortgage can have some costing elements and terms that are not always obvious and which can come back to haunt you after you’ve agreed to accept the financing and are in the middle of your project.

And unless you fully understand how all costs will be incurred, its easy to pick a construction loan offer that is actually inferior to other offers of construction financing presented to you.

Let me give you an example of a construction loan that on the surface has great appeal, but after closer inspection may not provide the best value to you.

A private lender offers a construction loan of $1,000,000 for 6 months at 9% registered in a second position on the property where construction is taking place.

A competitive offer for a private construction loan in second position would be in the 10% to 12% interest rate range. So on the surface, the 9% deal would appear to be a very good offer.

But after further, review you learn that there is also a 3% lender fee on closing plus a broker fee.

In addition, you have to make monthly interest only payments on the full amount of funds approved, not on the amount of funds drawn. So say after 3 months you have only drawn on 30% of the construction loan, you are still paying interest on 100% of the approved amount on a monthly basis, whether you are actually utilizing the funds or not.

In terms of draw advances, the construction loan will not cover HST so you’re also going to need a separate source of funds to cover sales tax as well.

Finally, the 6 month interest term is likely enough time to complete the project, but if its not, there is a 3% renewal fee to extend the term.

When you add it all up, the effective cost is far greater than 9% and the potential cost gets even higher if you have to apply for an extension.

Don’t Get Overly Focused On A Construction Loan’s Interest Rate

Yes, the stated interest rate for a construction loan is important, but what’s even more important is the effective rate of financing that takes into account all the costs you’re going to incur.

And because a construction loan is going to be for a short period of time, the difference in interest costs by one or two percent are likely going to be less critical than 1) how the interest rate is calculated; 2) what type of monthly debt service you’re going to have to cover; 3) fees on closing; 4) Draw fees; 5) and potentially extension fees.

Unfortunately, some lenders and brokers sell the stated interest rate hard and write in all the other stuff which, if you don’t pay attention to, can create a lot of additional cost and cash management grief to your project.

In order to do a fair comparison, its best to set up a spreadsheet and do an apples to apples comparison of potential offers before you sign off on a commitment for funding.

The best way to go through the exercise is to work with an experienced construction mortgage broker who can help you quantify all costs and also make sure that the terms and conditions of financing are a good fit for your project.

Click Here To Speak Directly To Construction Mortgage Broker Joe Walsh

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

“Construction Financing Interest And Offers Can Vary Considerably By Type of Project And Location.”

If you’re an active builder and developer, working most in the same localized market, there is a good chance that your going to be fairly well in tuned with you construction financing sources of supply. If there are any subtle changes in money that’s available at a given time, or changes in costs and terms from the lenders prepared to fund your deals, its not likely going to come as a bit surprise to you.

But when you’re looking at various projects in other locales than what you normally work, or even in areas you’ve never had a construction project before, don’t automatically expect that all construction mortgage lenders are going to act in the same fashion towards opportunities in the market. This regional diversity among construction lenders can be seen in both bank and private lenders. Just because a bank, for example, is across Canada, certainly does not mean that their policies for granting construction loans are going to be the same every where they operate. There are likely going to be adjustments or criteria that best fits their risk assessment approach in the local market.

The same goes for private mortgage lenders. With private lenders, most of what can be different is going to be related to price and exit strategy on the property being considered. As opportunistic lenders, private mortgage providers are going to price to what the local market will bear and what the competition is offering. This is not an absolute rule, but in general the more remote the location where the construction project is going to take place, the higher the cost of financing is going to be and the tighter the terms and conditions of construction financing as well.

Needless to say, one of the most important parts of planning out a project in an area you have not previously done business in is to 1) develop an understanding of the lender supply for your specific type of construction project, and 2) make sure that the true all in cost of funds can be covered by your cash flow and still yield the profit you’re after.

If you’re looking for construction financing in Southwestern Ontario, I suggest you give me a call so I can quickly assess your requirements and provide relevant construction loan options for your consideration.

Click Here To Speak With Construction Mortgage Broker Joe Walsh

The post Construction Financing Can Vary By Region first appeared on Ontario Construction Loans And Mortgage Financing.

“How To Secure a Construction Loan With Bad Credit”

First of all, construction financing is more based on equity in a property than most anything else. Of course if you want to secure a bank construction loan, everything is going to be important (equity, repayment, and credit), but when looking at private mortgage construction financing (which is what most people utilize anyway for construction), the overall fundamentals of the project are what’s most important.

Bad credit is also very relative. If you have a low credit score, there can be numerous reasons and circumstances as to what caused it. Some private lenders will want to understand the story, some won’t even look at your credit at all.

The more severe your credit is, there is the likelihood that it could even impact private lender interest in your construction project, but certainly doesn’t mean that private mortgage financing can’t be arranged.

The keys to any construction loan application is the value of the existing property where construction will take place, the projected market value and market interest of the completed project, the equity the borrower or builder is putting into the project, the track record of the builder, and the exit strategy for paying out the private lender at the end of the construction period.

If the exit strategy is to sell the property and the buyer has already committed, then issues around personal credit may not have any bearing on the project. If the borrower or builder will need to secure a long term mortgage to pay out the private lender at the end of the project, then its far more likely that bad credit will enter into the decision making process and could cause even a private lender source to decline your request for financing.

Bottom line for bad credit construction loans is that as long as the borrower can protect the interests of the private mortgage lender during construction and through a well defined exit strategy, then construction financing can likely be secured.

The probability of securing a construction mortgage if you have bad credit will also increase when you’re working on a project in demand in a highly active real estate market where the potential risk of loss or long resale is very low.

If you need a bad credit construction loan, give me a call so I can quickly assess your situation and provide relevant construction loan options for your review and consideration.

Click Here To Speak With Construction Mortgage Broker Joe Walsh

The post Bad Credit Construction Loans first appeared on Ontario Construction Loans And Mortgage Financing.

“The Most Effective And Lowest Risk Construction Loans Aren’t Necessarily The Ones With The Lowest Interest Rate”

When you go to buy a house, it makes sense that lower rate mortgages are going to be better than higher rate mortgages in almost all cases. Less interest cost means less strain on your cash flow, allowing more available funds for other spending requirements.

The same can’t always be said for construction loans for a very simple reason. A residential home loan is for an existing piece of real estate with a known and established market. A construction loan is for a work in progress project that may or may not end up being completed as projected.

Construction loans carry considerable completion risk with them that may need to be covered off in a number of ways. For lower cost forms of construction loans provided through banks, one of the risks is the banks conservative approach to loan administration that can result in a slower and more careful advancement of the funds than the project requires or expects. To offset this risk, the borrower or builder needs to have a secondary source of funds available to deal with any draw reductions or advance delays.

Higher interest rate construction loans that tend to be less administratively intensive are not automatically going to be a better fit either. Private mortgage construction loans provided by individuals can have just as many problems as a bank construction mortgage provided by an institutional lender.

The best construction loans tend to be a combination of rate and lender/broker construction experience that will best suit the project in question. The more straight forward the project, the less inherent risk and therefore the less need for working with a mortgage broker and lender combination that are more equipped to deal with the unplanned and unexpected twists and turns associated with construction in general.

With more involved projects, it becomes more important to make sure that the lender and broker combination you’re working with are well suited to your project, which can make all the difference if and when issues arise.

Sometimes paying a bit more on rate for the right lender match can be a bargain in the making. It just may be hard to make that determination at the outset of the project.

For assistance in locating, selecting, and securing construction loans that are going to give your project the highest expected probability of success, please give me a call and we can go through your requirements together.

Click Here To Speak With Construction Mortgage Broker Joe Walsh

The post Best Construction Loans Involve More Than Rate first appeared on Ontario Construction Loans And Mortgage Financing.

“There are Basically 6 Types of Construction Loan Mortgages and Two Lender Categories”

As we have previously discussed, there are 6 basic types of construction loan mortgages that you can acquire for different stages of a construction project.

The 6 construction loan mortgage types are:

• Land Acquisition Mortgage or Site Purchase Loan
• Site Development Construction Mortgage
• Builder Construction Loans
• Construction Bridge Loan Mortgages
• Condo Inventory Loans
• Long Term Take Out Mortgage.

While a typical construction project can require 2 or 3 of these construction loans during the time of elapsed time between planning and completion, the sources of funding can also come from different types of lenders.

From a lender category point of view, there are basically institutional construction mortgage lenders, and private construction mortgage lenders.

Both privates and institutional lenders can provide financing for any of the the 6 different types of construction loan mortgages listed above.  And for any given project, there can even be some combination of institutional and private lenders providing the collective construction financing requirments.

Even within these categories, there are many sub lender categories with respect to construction mortgage financing.

Within both the institutional lender group and the private construction mortgage lender group there will be specialization in only one or two areas of construction financing, and for larger commercial projects, the specialization can become more specific with respect to type of project and geography.

Private mortgage lenders in general are very regionally based for the most part which also lends to their strength as a lender in that they have a greater understanding of the local market in which they operate versus a national institutional lender with an area office in the same locale.

To say there are may slices to the construction financing market place would be a broad understatement.  Depending on the nature of a project and how well it progresses within its project plan, the construction financing structure can get both complex and convoluted with several different lenders involved during the course of the project.

As the dollar value of the project increases, it makes a great deal of sense to be working with a construction mortgage broker that has a construction financing focus for your type of project, in the area where construction will take place.   This may cost you a few dollars in brokerage fees, but compared to the money you can lose if construction financing for a stage in the project falls apart or is required on short notice to keep the project going, the return on investment can be considerable.

Click Here To Speak With Construction Mortgage Broker Joe Walsh.

The post Forms & Sources of Construction Loan Mortgages first appeared on Ontario Construction Loans And Mortgage Financing.

“Construction Take Out Mortgages For Builders or Buyers Are Not Always Available For Your Project”

It can be a crazy world out there.

Everyone can have their own interesting slant on what to build or what will sell in the world of construction. And some of the more creative designs and concepts have been known to be very lucrative.

But if you have a non conventional project in mind, and you happen to be able to secure a construction loan to build it, don’t be surprised if a construction take out mortgage may be difficult or impossible to get.

It’s the whole beauty in the eye thing sometimes when it comes to some of the projects that get completed. The problem though is that if a long term lender doesn’t believe there is a market for the more unusual, then you could be left scrambling, trying to pay out the construction loan before the lender ends up being the owner of your property.

One of the more common situations where this can become a problem is on an acreage or large lot where more than one building gets created, each with potentially different uses. From the builders point of view, this may be very practical and economical on a lot of levels, but from a take out mortgage lender point of view, the property and one of the buildings will likely be assessed for market value with the other non related building being completed ignored, regardless of its condition and functionality.

That’s why its always a good idea to at least scope out the market for a take out mortgage before the project commences even if one is not required at the beginning of the project by the construction mortgage lender.

Checking out the long term mortgage market is also an important exercise if you are planning to sell the completed project and property as it will give you a sense of whether or not your prospective buyer will be able to secure the long term mortgage required to complete the sale.

Mortgage lenders have definitely become more selective lately, so it would be considered wise these days to not leave long term financing up to chance later on in the project as you never know if and when a commitment may be forthcoming for funding to pay out the construction loan.

Click Here To Speak to Construction Mortgage Broker Joe Walsh

The post Make Sure Your Construction Loan Can Be Retired 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.

“Construction Mortgage Lenders Are Typically Interested In the Following Application Items When Considering Either A Residential Or Commercial Construction Loan Application.”

If you’re getting ready to apply for construction financing, the following is an outline of the most common information that is typically included in an application for financing.

While this is not meant to be an exhaustive list, it does provide a solid overview of the information you’re going to need to put together in order to get a construction mortgage commitment in a timely fashion.

Further, I have compiled the list so that it is directly relevant to both a residential and commercial construction project.

• Application Form Information. Like any other type of financing you may apply for, you will need to complete the lender’s application form providing pertinent information regarding your own identity, business description if applicable, and the personal net worth of the applicants. While you will likely be using a lender’s forms for this purpose, you can still be prepared in advance by creating an up to date personal net worth statement, business registration or incorporation dates, bank and trade references, and so on.

• Construction Plan. Each project is going to have a basic plan of attack and project overview that outlines the project being completed, who will be doing the building (turn key builder, general contractor, self build), and the basic costs and time lines, etc.

• Permits, Plans, and Drawings. One way to get a lenders immediate attention and speed up the construction financing process considerably is to have all the paper work in order in terms of drawing, plans, and permits. This group of documents will not only clearly show a lender what’s being built, but that you have the approval to build it.

• Building Budget. A well documented project budget generates a lot of confidence the accuracy of the cost projections as well as your ability to put together a project plan that isn’t likely to be compromised by a bunch of missing items that need to be added in later. Budget summaries should be will supported by written quotes and contracts for the work and material lined up in order to further build on their accuracy.

• Construction Time Line. Each task or action within the project, and the related cost of each as well as the timing for cost repayment should be organized into a construction project time line. Within this one picture, the whole project can be summarized in terms of activities, timing, and costs. The more detailed the time line, easier the project management will likely be as there will be very little if any guess work as to what needs to be done when and for how much.

Lenders may ask for additional information specific to an individual project, but for the most part, the above list will represent the 80/20 of a construction loan application.

To get help putting your application together and presenting to the most relevant lenders, give me a call and we can go through everything together.

Click Here To Speak With Construction Mortgage Broker Joe Walsh.

The post Application Requirements For Construction Loans first appeared on Ontario Construction Loans And Mortgage Financing.

“Once You Have Your Construction Mortgage In Place, The Next Big Financial Challenge Is Managing The Draw Schedule”

For most construction projects there are typically 4 draws where money is advanced against the construction mortgage approval to pay for construction costs incurred to the defined draw point.  The number of draws can vary for type of project, but for residential projects as an example, 4 draws are most typical.

While everything tends to be well laid out prior to construction commencing as to what needs to be completed for each draw, what happens in reality when you get to each draw request can be quite different from the plan.

This is especially true of institutional construction loans where the draw amounts need to be approved once the mortgage lender reviews the completion report provided by a third party appraiser. The role of the appraiser is to assess the remaining amount of work needed to complete the project and in many cases tend to be more conservative than what is actually required. The result of an overly conservative appraisal will likely see the lender reduce the draw request to make sure there are sufficient funds available to complete the project.

If a draw reduction occurs, the project is now put into a position of having to come up with another source of cash to get everything paid up to date and keep the overall project on track.

This is one of the potential challenges with any type of construction loan, but more common in the case of those issued by an institutional or traditional lender.

With private lenders, draws can also be cut back, but this is more likely to occur when required work elements defined for a particular draw are not completed. Private lenders don’t tend to perform cost assessments on the remaining work and are more concerned on the work done to date as compared to the building plan and time line they agreed to fund for each draw at the time of construction loan approval.

Another draw management challenge is the amount of hold back and eventual hold back payment. While the required hold back amount is 10%, institutional lenders tend to hold back as much as 15% of the total project costs. And at the end of the project when the hold back period is completed, the only way to get access to the hold back portion is through a long term take out mortgage with the same lender.

Private lenders tend to stick to the 10% hold back amount and will typically disburse the hold back at the end of the project when the hold back period has passed without any claims being made against the project.

There are other draw management issues to consider as well, making it one of the more challenging and potentially nerve racking aspects of construction project management.

For more information on how to effectively manage construction mortgage draws, click here to speak directly with construction mortgage broker Joe Walsh

The post Construction Mortgage Draw Management Challenges first appeared on Ontario Construction Loans And Mortgage Financing.

“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

The post Why Construction Loans Are Mostly Private Mortgages first appeared on Ontario Construction Loans And Mortgage Financing.