Commercial Site Development Financing
“Commercial Site Development Financing Can Be Very Sensitive To Location”
Commercial site development financing typically will depend a great deal on the location of the development as well as the type and structure of the development.
For instance, here in Ontario, there is a lot of site development financing available, but most of it will not venture beyond the boundaries of the Greater Toronto Area or GTA.
The same is true in other parts of the country where construction financing sources tend to focus heavily on the major metropolitan centers.
The reasons for this are fairly obvious.
Within larger markets, the ability to successfully exit a project in the event of borrower default is going to be higher in a larger market than in a smaller one, all other factors being equal.
And when you have markets like Toronto, Vancouver, Calgary, and Edmonton where the real estate activity is high and and growing, there is likely going to be more opportunities not only for the borrower to be successful with their project through resale of lots, but also for the lender in the event that the project stalls out for some reason.
This is not to say that commercial site development financing cannot be secured in solid communities that are outside of the main population centres, but the process for locating proper financing and getting it in place can certainly be a lot harder to accomplish, taking more time and money to complete in many cases.
The sources of site development financing that will look at projects in more rural or less populated areas can also be hard to locate as many of them will work through broker networks when originating and placing development financing.
The challenges will even relate to locations where the population is at or near hundred thousand so its not safe to assume that just because the project is well designed and a good fit for the local market that it will be easy or straightforward to get the commercial site development financing you are looking for.
If you’re planning out a commercial site development project either for lot development for resale, or internal use, or you’re in the middle of a site development project that still has a financing requirement, I suggest that you give me a call so we can go through your requirements together and discuss different construction development financing options that may be available to you.
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Land Servicing Loans
“Providers Of Land Servicing Loans Primarily Focus On The Value Of The Land And The Exit Strategy For Repayment”
We arrange land servicing loans for our clients in Toronto, the Greater Toronto Area, and parts of Southwestern Ontario.
While there is a considerable list of items that a lender for land servicing will focus in on, the primary areas of initial interest are the current fair market value of the land and the exit strategy that will drive repayment of the loan.
With respect to market value, its not uncommon for a particular development to be in the middle of a planning process with either a draft plan of subdivision in place or something that would resemble the same.
In these situations, the construction financing source is going to be looking to determine what the value of the land is today in the current state of planning, what the land is going to worth when final plan approval is in place, and what it will be worth upon installation of services.
For installation of services, if there are multiple phases of construction, unless all phases are going to receive land servicing at the same time, a commercial appraisal should reflect the market value of each phase individually versus providing a market value for the entire development once services are installed.
This is due to the fact that lenders will likely structure their draws to align with phases of development and want to know that at each completed phase that the property has appreciated in value sufficiently to provide the security they require to move forward with further advances.
At the other end of the equation is the exit strategy to repay the loan in the future.
All land development exit strategies are going to involve the resale of all or part of the property requiring the land servicing loan, so the strength of the exit strategy has a lot to do with who the potential buyer or buyers are, and how strongly they are contractually committed to a purchase once land servicing is completed.
Taking this one step further, in situations where there a single builder prepared to acquire lots over a period of time, the financial strength of that individual company will be extremely important to any lending/funding decision.
While not automatically the case, more arranged buyers or conditional sales to financially strong buyers, presents a stronger, lower risk exit strategy to potential lenders.
Once again, there are many other aspects of the development that a lender will focus in on, but if the market value and exit strategy cannot support the deal, the other factors will not make much difference.
If you require a land servicing loan, I suggest that you give me a call so we can go through your requirements together and discuss potential land servicing loan options available to you.
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Land Development Refinancing
“Land Development Refinancing Sources Will Depend On Cash In The Deal And Strength Of Repayment Strategy”
Land development refinancing typically occurs when a project has completed the initial planning stage and requires incremental capital to develop and service all or part of the development, or when the term is up on an existing mortgage and the lender is no longer interested in keeping their funds in the project.
The initial mortgage that is in place may have been a land loan to help acquire the property, or a mortgage acquired post acquisition where funds were used to help fund the planning work required to get all the necessary approvals and zoning changes required to move the project forward.
If the land development refinancing is at the stage where construction development work is going to begin or continue, then the sources of financing that will consider this type of opportunity will be looking very closely at the property owner or developers cash development plan as well as their exit strategy to repay the debt.
From a cash investment point of view, institutional lenders can vary in terms of their interest in funding both hard costs and soft costs. Its not uncommon for the lower cost forms of construction financing to only finance a percentage of the hard costs, requiring the developer or property owner to fund part of the hard costs and 100% of the soft costs as the work is completed.
The exit strategy is also going to be important and its not uncommon for all forms of land development refinancing sources to want to see a significant number of pre sales before they will be prepared to fund a particular project.
Its not uncommon for a development property to appreciate considerably in value once zoning milestones and site plan approvals have been acheived.
However, in order to leverage the incremental market value in the land, the combination of cash investment in the project to date as well as incremental cash to invest and a solid exit strategy are still going to be important aspects of getting land development refinancing.
This is why its important to start working with potential development refinancing sources early on in the process so you can make sure to structure both your cash flow and business model in a fashion that will most likely meet with lender requirements.
Otherwise, land development projects that have a lot of potential can still have a hard time attracting capital due to their inability to sufficiently cover off lender risk.
If you in the planning stages of land development project, or require land development refinancing for a project you are currently in the middle of completing development, I suggest that you give me a call so we go through your requirements together and discuss potential land development refinancing options that may be available to you.
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Land Development Financing Versus Building Construction Financing
“Land Development Financing Can Be Much More Difficult To Secure Than Building Construction Financing”
Land development financing either for a subdivision or site development work prior to building construction can be considerably harder to locate and secure at times compared to conventional construction financing.
The main reason for this is the amount of variable that are associated with land development work as compared to building construction that is being performed under a building permit.
With land development financing, the magnitude of risk is much higher due to the unknowns associated with moving earth and working in the under ground. More things can go wrong and/or will take more funds to complete than budgeted. And unplanned items can also crop up that have to be dealt with.
Needless to say, there is a considerable amount of skill required to manage land development projects which is also why builder or developer experience tends to be the first main criteria considered by most sources of land development loans.
And experience can relate to a number of things such as 1) the number of projects the land developer has worked on of similar size and scope to the one requiring financing, 2) the degree of success they have had completing the project within the regulatory requirements and budget, 3) the amount of financial success or failure they have encountered from past projects, and 4) the level of customer service they have extended to those they have sold developed property to.
Outside of developer experience, there are many other critical elements that a construction lender will look at when considering land development financing including the amount of pre-sales that have been made, the source of the budgeting estimates, the amount of equity invested in the project, and the overall timelines and details for both completing the work and reaching the planned point of exit just to name a few.
Also, depending on how the business model for a given project is structured, it may not suit the lending/funding requirements of certain lenders so its going to be important to understand who in particular will be interested in a deal, or how the deal will have to be structured or altered to meet the sources of funding that are available to the developer.
The best way to land development financing is to work through an experienced construction mortgage broker who has access to a broad cross section of commercial mortgage lenders that will consider these types of projections.
If you are in the early planning stages of a land development project, or in the middle of an ongoing project, I suggest that you give me a call so we can go through your requirements together and discuss different land development financing options available to you.
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Subdivision Development Financing
“Subdivision Development Financing Focuses Primarily On Plan Approvals, Owner Investments, And Exit Strategies”
Subdivision development financing is arguably the toughest form of construction financing that there is to arrange.
The main reason being is that there can be an enormous amount of requirements and moving parts where if even one cog in the wheel starts to stick, the whole project can become delayed or even collapse.
Compare this to construction financing where a building permit is issued by the governing body responsible for building requirements on the property and development financing becomes a whole different kettle of fish.
In many cases, subdivision development financing is not provided by banks or institutional lenders either. This is largely because the projects cannot provide cash flow debt servicing for large periods of time which is viewed to be a higher risk lending scenario and as a result, does not tend to meet the risk requirements of front line branded lenders.
To provide subdivision development financing, the lending source has to understand the business and have the ability to assess the status of a given project and be able to determine if a deal can be structured that will meet the lending/funding requirements of the organization.
Because of the amount of detail that can go into a development, a non experienced lender or non specialized lender can have a hard time wrapping their head around the deal and typically a confused mind always says no, so its going to be important to be working with someone who knows their way around subdivision development financing.
Aside from the requirement complexity, a suitable lender is going to be focused in on the capital contribution made to the project by the developer or developer group as well as the exit strategy for selling off the development and repaying the construction development mortgage.
Many times, subdivision developers will either sell off the developed lots to builders, or partly sell off lots and partly build out lots themselves.
In either case, the strength of any sale arrangement, including the financial stability of the buyer or buyers is going to be key to any lender that will consider providing subdivision development loans or mortgages.
From an owner or developer financial contribution stand point, the more funds invested in the project by the owner or owners, the stronger the likelihood of acquiring development financing as well.
There is no question that as planning milestones are met that the value of the property goes up in value and over a period of time, the completed regulatory work can add considerable market value to the real estate.
But relying heavily on sweat equity can also limit the number of potential lending suitors as there is no replacement in the risk assessment model for the investment of hard cash.
Developments that are in outlying areas are also going to be more challenging to finance as compared to those in major centers. But if the lot absorption rates are reasonable and the project timeline not extending past two or three years, then the probability of subdivision development financing being available to your project is going to be a lot higher.
If you have a subdivision development project that you are planning or are in the middle of where development financing will be required at one or more stages of the project, then I suggest that you give me a call so we can discuss your project in sufficient detail and see what subdivision development financing options are available to you.
Click Here To Speak With Toronto Mortgage Broker Joe Walsh
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Toronto Construction Mortgage Broker
“A Toronto Construction Mortgage Broker Can Provide Access To A Variety Of Construction Loan Financing Options”
A Toronto construction mortgage broker can be a great asset to a construction project in a number of ways.
First, and foremost is the ability to connect builders, developers, and property owners with relevant sources of construction financing. When we speak of relevant sources, we’re talking about lenders that are going to be highly interested and competitive when looking at a specific construction project financing request in a specific geography for a specific borrower profile.
There are basically three different categories of construction financing and within these categories will be different lending and funding requirements from one lender to another.
At the lower cost end of the spectrum is construction loan provided by banks and institutional lenders. The key with this type of financing is making sure you are able to properly qualify for it which is another area where a Toronto construction mortgage broker comes into play.
In what we will call the mid market for construction financing are the sub prime construction lenders or quasi institutional lenders which can include investment bankers, private mortgage funds, and so on. The cost of financing is going to be slightly higher than a bank, but the qualifying terms and draw advance requirements not as complex in most cases.
At the other end of the construction financing market is private mortgage lending, which will likely be higher cost than the other two, but come with a greater degree of speed and flexibility with respect to loan qualifying and draw administration.
Once again, each of these lender categories have their own unique fit and getting the right borrower to lender match can be key to successful cash flow management in any construction project.
So not only can an experienced Toronto Construction Mortgage Broker introduce you to suitable lenders from each of these categories, they can also help you establish which lender offering will be the best fit for your project at a given point in time.
Another major benefit of working with a Toronto Construction Mortgage Broker is having the ongoing support available to you during the project to deal with any lender funding issues that may arise.
Draw management at times can be complex and its not unusual for issues to arise that can slow down draw advances or even see draws reduced. Having a good construction mortgage broker on your project team will help increase the likelihood that these issues will be resolved quickly if they do arise, and that the impact on the project will be minimized.
If you have a construction project you’re currently planning or are in the middle of in Toronto or Southern Ontario, I suggest that you give me a call so we can quickly assess your situation and provide construction financing options for your consideration.
Click Here To Speak With Toronto Construction Mortgage Broker Joe Walsh For A Free Assessment Of Your Construction Financing Options
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Multi Unit Condominium Construction Financing
“Multi Unit Condominium Construction Financing For Condo Build And Inventory”
Multi unit condominium construction financing is a available from our institutional, sub prime, and private mortgage lending sources.
For condo build financing, the keys to getting funds in place are going to include but not be limited to: 1) the market feasibility of the project in terms of short term resale potential, 2) the amount of equity investment the owners of the project are investing in the deal, 3) the track record of the owners, builders, and/or developers completing similar projects on time and on budget; the budget of the project and the validation of its accuracy from third parties; and the number of condo units that have been presold prior to construction starting.
With all potential condo construction financing requests, there are potentially three different types of financing options that are going to be available to them, ranging from bank or main line institutional lender, the sub prime quasi institutional lender, and the private money lender.
The goal for any project is to match the borrowers up with a lending source that is the most relevant for the projects profile and can provide the capital required for the cost and terms that a borrower is prepared to accept.
For projects that are completed and have received condo status, we can also arrange condo inventory loans for our customers as required.
A condo inventory loan is typically required at times for a couple of different reasons.
The most common reason is that at the end of the project, there are still operating costs to get covered off on a monthly basis before sales from condo units are received, requiring an incremental source of money to aid the cash flow. With a condo inventory loan, the incremental fair market value of the project is being levered to provide the additional capital needed to make the cash flow work in the short term.
Another reason for a condo inventory loan is refinance more expensive construction financing once the risk of construction has been removed.
The last most common reason for a condo construction inventory loan is when the builder or developer requires an equity take out for a new project they are trying to get going and need an inventory or bridge loan to draw on the equity before the proceeds from condo sales are received.
Regardless of the condo building construction requirements or the condo inventory requirements, are goal to match up our clients with the most relevant sources of multi unit condominium construction financing as quickly as possible.
If you are looking for multi unit condominium construction financing for a project you are planning or are in the middle of, I suggest that you give me a call so we can quickly go over your requirements and provide different financing options for your consideration.
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Multi Unit Construction Financing
“Multi Unit Construction Financing Loans Continue To Be A Very Popular
Lending Product”
Multi Unit Construction Financing Loans And Mortgages are a very popular item with lenders in areas where the supply and demand numbers make sense.
Of all the different commercial mortgage financing programs out there, multi unit construction financing is arguably right at the top of the heap in terms of lender construction financing interest.
The category of multi unit construction includes condominium projects for both residential and commercial use, retirement homes and long term care facilities, student housing, apartment buildings, and so on.
All of these forms of investment property provide the basis for being able to cash flow and debt service the financing required by either the buyer or the developer to pay out the construction loan at the end of the project.
The keys to strong competitive interest in a project is going to include the market suitability, the owners investment or planned investment or equity position in the build, and the exit strategy to either resell units upon completion, or rent out occupancy to generate cash flow for a long term take out mortgage.
Because of the high lender interest in multi unit construction financing requests, there are different slices of the lender market available to builders, property owners, and developers.
The best rates are likely going to be coming from the major banks and institutional lenders who occupy the lowest risk lending space in the market. But with cheaper rates also comes more stringent requirements for financing that may or may not fit your project.
If you have a project that does not qualify for major bank multi unit construction financing, there may be several other options to consider.
The next level of options could be called sub prime or quasi institutional where the rates may be slightly higher than what you could get from a primary or secondary bank, but the financing requirements may also be not quite as strict as what you will typically find with the lower cost sources of construction financing.
Especially in large geographic centers, these second tier lenders can be both Canadian and U.S. based, as there is a lot of investor interest to get funds into the Canadian market space due to the economic stability in Canada as compared to other areas of the world, including the United States.
Beyond this secondary lender group, there are also private mortgage lenders that will fund multi unit construction loans.
The majority of private mortgage lenders that will finance multi unit construction will focus on projects under $5,000,000. That being said, there are mortgage investment corporations and syndicated lending groups that will consider large multi unit construction loan requirements as well.
Because of the number of potential funding sources out there, each with their own unique program requirements, its going to be important to make sure that you’re project is well aligned with a source of multi unit construction financing that best meets your requirements.
In order to accomplish this, your best approach is to work with a commercial mortgage broker who can introduce you to multi unit construction financing sources that are highly relevant to your construction financing needs. An experienced mortgage broker can potentially save you considerable time and money compared to what you might end being able to arrange on your own.
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Home Construction Loan
“Considerations For Securing A Home Construction Loan”
If you are looking to build a residential home for your own use, here are a number of things to consider before signing up for any home construction loan offer.
For the most part, a home construction loan is either acquired by an individual that his paying a builder for a turn key finished product where the property owner does not play an active role in the management of the construction project, or property owner is orchestrating a self build construction project whereby the owner will serve as the general contractor and coordinate the sub trades and all other elements of the build.
In either case, a home construction loan can be obtained by the property owner, but in the case of self build construction, the lender may want to see more evidence of the owner’s experience and ability to successfully manage a home construction project.
A home construction loan can be obtained from both bank and private mortgage lenders. There are benefits to both types of lenders that can cause you to select one over the other, even if you qualify for both.
For the most part, a bank or institutional lender will only provide a home construction loan as a first mortgage against the property where construction is taking place, requiring the builder or property owner to have 100% paid in ownership of the land in question. With a private mortgage lender, a home construction loan can be placed in a second mortgage position, provided that there is sufficient equity in the property and project to protect the private lender’s risk.
Regardless of the source of a home construction loan, there are typically three draws set out to advance the construction financing. The first draw is usually advanced once the building is closed in with roof, windows, and doors in place.
The second draw will normally take place once the dry wall stage is complete which will also encompass the completion of the wiring, plumbing, and heating systems being installed as well.
The third draw will be advanced at or near completion of the remaining work.
For larger homes, the building process can take a lot longer to complete, so there can be additional draws added to the project schedule to better manage the timing required to pay for materials and trades.
Before you start applying for a home construction loan, you should first put together a solid budget for the project as well as a timeline for completion that outlines when all the work elements will be completed. You should also have a set of professionally prepared plans and drawings completed to provide greater support for your construction financing request.
If you are planning a home construction project, or are in the middle of one and require a home construction loan, I suggest that you give me a call so I can quickly assess your requirements and provide home construction loan options for your consideration.
Click Here To Speak With Toronto Mortgage Broker Joe Walsh For A Free Assessment Of Your Options
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Construction Bridge Loan Financing
“Here Are The Most Common Situations Where We Provide Construction Bridge Loans And Mortgage Financing To Our Clients”
Every once in awhile we need to provide a construction bridge loan to a builder, developer, or property owner that is mid way through a construction project and requires additional funds to complete the work.
All of the construction bridge loans we place are through private mortgage lenders due primarily to the speed in which they can react to a bridge financing request.
In these situations, the money is required right away so that the project doesn’t stall out and other costs start being incurred. So being able to get something in place quickly is paramount to the the owner of the construction project.
One of the reasons that construction bridge financing can be placed rather quickly in most situations is due to these requests typically come near the end of the project when most of the building or construction risk has been removed from the lending equation. Also, the amounts required tend to be considerably smaller than the increased value of the property from building, providing ample securing to a construction lender, even if they need to be in second or even third position behind the primary sources of financing for the property and project.
The most common scenarios where a construction bridge loan is required is as follows:
Budget Over run: This is probably the one we see the most often where certain stages of the construction project have cost overruns due to inaccurate budgeting or unforeseen and unplanned events that created more costs for the project. The result is that the project ends up costing more than expected and requires additional funds to complete.
Change In Scope: While similar to the first scenario, a change in scope in not about the budget for the project being overrun by higher costs. This is a result of the builder, developer, or property owner making a conscious decision during the project to make a change to some aspect of the build which results in more costs for the project. This can be things like a bigger kitchen, finished basement, more landscaping, and so on.
Primary Construction Loan Shortfall: This is the least common of the three, but it does happen more often than one might think. Under this scenario, the primary construction lender that is in place is not providing draw advances when the builder or developer expects them to be made. And in some cases, the draws can also be cut back by the lender if in their view there is more of the project remaining to be completed than what the builder or developer is declaring. In any case, there is not enough money being advanced when required and the result is a need for incremental capital to offset the short fall.
While there are lots of private mortgage lenders in the market place, only a small handful will do these types of construction mortgages and do them quickly enough to meet the needs of the construction project.
The best way to get access to construction bridge loan financing is to work through a construction mortgage broker who has direct relationships with these types of lenders and has a track record for placing construction bridge mortgages.
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Value Of Home Renovation
“If You’re Looking For Home Renovation Project Financing, You Might Want To First Consider The Economic Value Any Given Project Contributes”
If you’re like most people considering home renovation, there are likely a number of projects you’d like to take on, but will limit what you actually invest in doing today based on the amount of capital you have to complete the work.
And what you include in the scope of work is going to have both an aesthetic value to you and an economic value to the market place.
Sometimes the personal value and economic value are very similar and sometimes they’re not.
One way to get a better idea of how much certain types of home renovation activities or projects can add to the value of your home is to utilize a valuation tool like the one provided by the Appraisal Institute of Canada. Here’s a link … http://bit.ly/G6S5a
This handy little tool allows you to put in cost estimates for different types of home renovation works and provides an estimated range of value or return on investment you can expect to earn over time from the completed work.
Keeping in mind that this tool provides you with some pretty broad ranges of potential value, the real benefit of using it is to get a comparative assessment between different renovation projects as to which ones add more value to your home than others.
Depending on your mindset and motivation for doing certain renovation work, this may not have any bearing whatsoever on what you choose to spend your money on.
But if economic value is important, this can at least give you something to think about as you plan out the complete scope of work and the related budget.
Another thing to keep in mind is that for renovation projects where construction mortgage financing will need to be procured, an assessed value of your home post renovation may be important in terms of the amount of money you can borrower.
Or put another way, the higher the value added renovation work being undertaken, the greater the increase in value in your home, and the more potential funding that can be raised against the future value of your home.
If you’re looking for a home renovation loan, I suggest that you give me a call so I can quickly assess your needs and provide relevant options for your consideration.
Click Here To Speak With Toronto Mortgage Broker Joe Walsh
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Construction Financing Possibilities
“There Can Be Many Different Ways To Arrange Construction Financing
For Your Project”
As a property owner or builder seeking debt financing for their construction project, one should always keep in mind that there really is no such thing as a standardized construction loan and that construction financing can be arranged in a number of different ways.
Many times someone will call me up with a specific request for construction financing along with a predefined way to put the money in place, and after some discussion it becomes apparent that there are other approaches to consider in addition to their current thinking.
Basically most construction loans per say are for a specific amount of financing, secured by a mortgage registered against the property.
And while we can say this is the typical form of construction financing, there are lots of variations that can come into play.
For instance, if a builder or property owner has another property, it may be far cheaper and simpler to get a home equity loan against the available equity than getting a traditional construction loan in place.
Or, if the amount of funds required is small, a personal term loan or additional line of credit may provide enough capital at much cheaper rates and with more flexibility when it comes to utilizing the funds.
The same can be said in choosing between a bank or institutional construction loan and one provided by a private mortgage lender.
The listed cost of financing will always be cheaper through a bank, but in the end it may not be the best fit for the project and may not end up being the cheapest either once all the dust is settled.
For individuals trying to figure out how to finance a construction project they are planning or are in the middle of, it can be easy to self assess incorrectly the best approach to take to meet the requirements of the project for the lowest cost.
Because of the potential different approaches that may be taken, it makes a great deal of sense to be working with a construction mortgage broker who can review everything you have to work with as well as your construction project requirements, and then propose financing options that provide the most benefit and value to you.
Utilizing this type of expertise, especially if arranging your construction loan is an infrequent or one time exercise, can end up being a considerable time and money saver in the long run.
If you would like to discuss construction financing approaches for your next project or one you’re currently working on, please give me a call and we’ll go through everything together.
Click Here To Speak With Construction Mortgage Broker Joe Walsh
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Lower Cost Construction Loans
“There Is A Recipe For Getting Lower Cost Construction Loans”
Lower Cost Construction Loans in Toronto or the rest of the Greater Toronto Area area always going to be a function of the quality of the project.
And when I speak of lower cost, I’m not potentially referring to the lowest interest rate you could secure. My reference here is more to cost within a category of construction financing.
For instance, the lowest cost category of construction mortgage loans is from a bank or institutional lender, but many property owners and builders will still not choose this source of financing and prefer a private mortgage financing option for a number of different reasons.
Regardless of what type of construction mortgage you select or prefer, there can still be a pricing range for the financing costs in that range, whether that is within the discretion of the individual lender or a function of competition.
And the better projects are going to get better or lower cost construction financing offers.
There are many things can be considered by a construction mortgage lender with respect to deeming that a project is worthy of a lower rate of interest. Lets go through a few of them.
Project Scope And Location: A project that is located in a well developed market area for similar projects where the market is very active and resale value fairly predictable is going to be more interesting to construction lenders in general than a project that does not have these location and scope characteristics.
Project Organization: The more detailed the project plans, budgets, and time lines as well as the compliance with regulatory requirements at the time of the construction financing application, the stronger the project is likely going to be in the eyes of the lender.
Builder Track Record: If you’re working with a builder or are a builder with an established track record that is documented and can be supported by third parties, then there is going to be more confidence in the overall building process.
Any type of financing is about eliminating or reducing the risk of loss. The stronger a construction project is in all the areas above as well as in other areas that could impact the positive completion of work, the more likely it will not only attract considerable lender interest, but construction mortgage lenders will be prepared to compete for the project which is ultimately what we’re looking for to secure the best potential financing costs in the construction loan category of interest.
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Mechanics Of A Construction Mortgage
“How Is A Construction Mortgage Arranged Compared To Other Types of Mortgages?”
From a mortgage registration point of view, a construction mortgage is exactly the same as any other type of mortgage instrument. It can also be in first, second, or third position, depending on the situation. The key aspects of a construction mortgage over a conventional mortgage is the manner in which the lender assesses the borrower request for financing.
With a conventional mortgage, the property value is determined at the outset of the process and used to establish the amount of mortgage financing that can be provided. With construction financing, the initial property value is going to be important as well as the ending property value.
The starting point for a construction mortgage request assessment by a lender is to look at the existing property value where construction is going to take place. The existing property value and equity is essentially the initial down payment for the mortgage. The lender also completes, or gets completed, a post construction appraisal to determine what the value of the property will be after all the work is completed. With the beginning and ending numbers in hand, the initial equity in the property is assessed to see if it is sufficient to cover the lender’s risk. If the initial equity is insufficient, then the borrower will be required to self fund the initial construction work up until such a point where the owner equity in the property is sufficient for the lender’s program.
In most cases where the borrower or applicant for a construction loan has insufficient equity in the property at the outset of construction, the lender will require the borrower to fund all costs up to the completion of the first draw as its been defined. If the initial work is completed according to the requirements of the project and meets the approval of the lender’s third party appraisers with respect to increasing the value of the property as required from the outset, then the lender will be prepared to consider advancing funds to cover the remainder of the work.
I use the work “consider” in that at each stage of completion, the project will be assessed by the lender or their third party representatives to determine if the work is completed meets the requirements of the project and that there is sufficient funds remaining from the construction mortgage approval to complete the remaining work. If in the lenders determination the work is incomplete at the time of a draw request, or that there is more work remaining to complete the project than funds available in the mortgage approval, the draw request can be denied, delayed until the work is adequately completed to that stage of construction, or cut back requiring the borrower to invest further capital.
The key aspect of the process is that a construction mortgage gets advanced according to the completion of work that follows a predefined plan that adds value to the property at each step of completion.
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Construction Mortgage Planning
“Get A Jump On Your 2011 Construction Mortgage Planning Process”
For those of you looking at completing one or more construction projects in 2011, now’s the time to start the construction mortgage planning process.
Even if you’re looking at a late summer or fall start, getting a jump on arranging construction financing is typically a good idea for a number of reasons.
First, and almost without exception, property owners, builders, and developers will spend almost all their up front time planning out the work, leaving the construction financing aspect until the very end of the pre construction period. Inevitably, they leave it too long and it can be a challenge to get everything lined up and in place by the planned start date, especially for first time builders.
Second, in the early part of the year, there is going to be less application volume being put in front of lenders (at least in most years), which means lenders may be more flush with funds and will be wanting to get their money out in the market place. While early shopping doesn’t guarantee a better deal, it certainly is possible, especially with private lenders.
Third, in reverse to #2 above, if you plan to start a project in the prime building season in Ontario, there is going to be a lot more competition for available funds. Better deals will get better rates, and more applications in general will slow down the overall process for each individual applicant. As I mentioned, most people leave the construction financing process to next to the last minute, or at least towards the back end of the planning period, so the herd mentality is going to kick in later spring and early summer with everyone looking for construction loans all at the same time, putting greater stress on the financial system to process and approve requests on a timely basis.
Fourth, going through the construction mortgage planning process early on may uncover flaws in your construction financing assumptions, causing you to go back to the project scope and perhaps make some changes to the budget to more align with the construction funding your going to be able to secure.
The best first step is to find an experienced Toronto mortgage broker that you trust and start working with them early on in your planning process so that you can avoid some the problems associated with starting the process too late and gain the benefits of getting at it early.
Click Here To Speak With Construction Mortgage Broker Joe Walsh
Ontario Mortgage Broker
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