“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.

“The Key To Most Construction Mortgage Approvals Is The Amount of Money and/or Equity You have Committed To The Deal”

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.

Click Here To Speak To Construction Mortgage Broker Joe Walsh

The post Construction Mortgage Down Payments 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.

“If You Are Able To Qualify For Any Type Of Construction Financing, Do You Choose A Construction Mortgage Based On Cost Or Complexity?”

In a world where time is money, someone looking to finance a construction project needs to take that sentiment to heart.

The nature of construction projects is that they come with a certain level of risk where things can go wrong and they can become a time consuming to properly manage.

When it comes to construction mortgage financing, the same things are true. What also is true is that similar to all forms of financing, lower cost, means lower risk. In order for lenders to provide low rates for a construction mortgage, they are going to place requirements and qualifications in place that will assure them of a low risk lending scenario.

This is where the cost trade off for borrowers comes in.

Lower cost construction financing in most cases is going to be more work and more headache to deal with all the terms and conditions and their sometimes  seemingly unpredictable application to your project. There is nothing wrong with low cost deal. In fact I’ve never met anyone that doesn’t prefer it. But it does come with strings and each borrower who can afford to do so needs to decided if the added time and potential other costs that can come with it will be cheaper overall then selecting a construction mortgage with a higher interest rate but greater ease of use or convenience.

Its not uncommon for borrowers to find this hard to understand as after all many times their collective financing experience is based on buying a house, leasing a card, securing a credit line, applying for a credit card, and none of these are all that difficult to get if you have a strong financial profile and good credit.

But getting approved is only the first part. Meeting the conditions of the loan or mortgage are yet another. And when it comes to something like a construction project, the requirements and conditions can be very difficult to meet in some cases.

This is one of the reasons why private mortgage lenders provide a large majority of the construction loans issued on an annual basis across the province of Ontario.

Yes, private mortgages come with higher interest rates, but on average are approved much faster, provide a higher percentage of the construction costs, and have much more predictable and manageable draw schedules.

One form of construction mortgage financing is not necessarily better or worse than another. But to strictly be fixated on the interest rate may cause you to end up with a higher cost construction financing solution once you factor in all related costs, including the opportunity cost of your time.

Click Here To Speak With Construction Mortgage Broker Joe Walsh

The post Construction Mortgages – Cost Versus Complexity first appeared on Ontario Construction Loans And Mortgage Financing.

“Make Sure You Read All The Fine Print Before You Sign Back A Construction Mortgage Commitment”

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.

Click Here To Speak With Construction Mortgage Broker Joe Walsh

The post Construction Mortgage Commitments 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.

“When Going Through The Process of Arranging Construction Financing, Remember That All Lenders Are Far From Equal”

Compared to almost any other type of mortgage financing, construction financing can be very challenging to administer for both the borrower and the lender.

Remember that the nature of a construction project is to build something out in the open where weather and landscape can play a big factor in both coordinating work and estimating costs. Add in all the people that need to be organized and deployed to perform work and its a headache in the making.

So before going down this less than linear path, its important to align yourself with a lender that you are going to be able to work with and that will work through issues that may arise from time to time.

When considering an institutional lender, there are going to be some pretty clear policies and procedures in place that guide how the organization will manage your construction mortgage requirements and draw requests. But the institution is still run by people, and if you don’t have a good feeling from the person that’s going to be assigned to your construction mortgage, you may want to consider another source.

Seriously.

If you don’t have someone you feel you can work with, communicate effectively with, or believe they will fight for your benefit, move on.

With private construction mortgage lenders the lender selection process is even more important. Often times, a private mortgage lender is a single individual working through a lawyer, and managing their own mortgage administration. There aren’t going to be any written policies and procedures to count on so you need to make sure that you are comfortable with the person in charge or they could become the bane of your existence if the project has some unexpected twists and turns to it.

Many times, the builder, developer, or home owner are in a hurry to get the project started and may end up signing up for a construction building loan from someone that doesn’t necessary give them a warm and fuzzy feeling, but is prepared to fund the project.

The thinking that money is money and that the personality aspect shouldn’t enter into it is wrong, or can be wrong depending on how the project goes. If everything happens according to plan, then any lender will likely do. But if there are any hiccups, which are not at all uncommon with a construction project, the personalities involved can either help solve the problems or make them worse.

If you have the time to make a lender selection both in terms of rates and terms as well as project management experience and approach, then I would advise you to sign up for the best overall selection, even if it’s not the best interest rate.

This is yet another reason why you should always consider using an experienced mortgage broker to not only help you locate a suitable construction lender, but help you manage the interface as well so you have one more person in your corner if issues do arise.

Click Here To Speak With Construction Mortgage Broker Joe Walsh

The post Construction Financing Success Can Depend On Lender Selection first appeared on Ontario Construction Loans And Mortgage Financing.

“While There Is Still Lots of Construction Financing Available, It’s Become a Bit Harder To Secure”

The construction industry is coming out of the doldrums of the last few years and starting to show signs of getting back to normal or more close to normal in 2010.

While the overall economic out look is picking up, the same can’t be said for the capital markets and as a result, construction financing is harder to secure right now that just a short time ago.

That being said, there is still a lot of construction lending going on. Its just that lenders are tightening up on the application of their lending criteria, making those seeking financing dot their i’s and cross their t’s to a larger extent than what they may be used to.

With the collapse of the sub prime market space and the higher degree of selectivity of the traditional institutional lenders, more construction loan applications are making their way to private money sources which in a way is not unusual, as private lenders provide the majority of the construction mortgages issued every year.

What is different is that the privates are getting more requests and in some cases demand is outstripping supply, causing private lenders to also be able to be more selective with the deals they decide to take on.

The key take away from all this is that if you’re seeking construction financing for land acquisition, site development, or building, you are going to be expected to have all the project details flushed out and properly supported before any application for mortgage financing will be seriously considered.

There will always be exceptions to this as privates are individuals that follow their own rules, but for the most part construction funds are going to be flowing to the borrowers that provide superior, verifiable details than those who operate more fast and loose.

This trend is likely going to continue for some time, so its an adjustment that applicants need to make or they could be spending a lot of time searching for money that just isn’t there.

If you have a construction project that your planning or in the middle of that requires construction financing, please give me a call so that I can quickly assess your situation and outline relevant options for your to consider.

Click Here To Speak With Construction Mortgage Broker Joe Walsh.

The post Construction Financing Reqirements Are Tightening Up first appeared on Ontario Construction Loans And Mortgage Financing.