Here’s the scenario.

You’ve got a construction project that’s been a bit slow to come together and you’re on the verge of incurring costs for delays if you don’t get started right now.  Your construction loan has just been secured, removing your last obstacle for getting started.

But you still haven’t located long term financing to take out the construction loan at the end of the project.

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So, what should you do?

Before answering that, lets explore what can happen at the end of your project if the a long term mortgage that pays out the construction loan has not been arranged.  If the delay is relatively short, you’re going to have to continue to pay the higher cost of interest from the construction loan.  Depending on the terms and conditions of the construction mortgage agreement, there may even be penalties the lender can charge you if the delay exceeds certain time lines or pre established dates.

And if there is significant delays, you can even run the risk of the lender taking legal action against the property to get their money back which could result in you not only losing the property, but some or all of your equity as well.

So starting the project without the “Take Out Financing” in place is a definite risk that you need to consider. And thinking that there won’t be a problem securing long term financing in time is the very basis of the “Construction Loan Take Out Trap”.

Before making the decision to proceed with construction, consider the following suggestions:

First, can you delay the project to either locate and secure long term financing or at least get an assessment of the potential for securing a take out mortgage in the time period you have to work with for the terms you’re seeking?  If there are delay related costs, what are they, and can they be managed in your budget?

Second, if you can’t delay any further, make the process of getting long term property financing arranged an immediate priority.  Once the project gets started, this activity can be put on hold or significantly delayed due to the time demands that can come from project management.  Don’t wait until later in the project to get back to looking for financing as you may run out of time and incur some or all the financial penalties we’ve discussed.

Third, if you’re not already working with a construction financing specialist, get a hold of one right away and have them start working on your take out strategy so there will be less risk of any issues at the completion of construction.

To make sure you avoid the construction loan trap altogether, I would suggest that you give me a call to get a free assessment of your options.  I’ll help you make the best decision and get everything arranged.

Here To Speak With Construction Financing Specialist, Joe Walsh

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