Even if you feel you’ve done everything right managing the administration of your construction mortgage draws, there is still can be problems when it actually comes time for the lender to advance funds.

Regardless of how well the work flow is mapped out and budgeted, there can still be lender draw reductions that can cause both a strain in your cash flow and your project timelines.

Let me explain.

When a building milestone gets completed and triggers a construction loan draw, the lender will make an assessment of the completed work versus the work remaining and determine if the pre-defined draw amount can be advanced, or if it will have to be reduced.  Draws get reduced if the lender determines that the projected costs to complete are higher than expected at that particular stage in the process.  The lender will then reduce the draw amount so that sufficient funds will be available to complete the rest of the work.

Typically with traditional bank construction financing, the lender is depending on a third party appraiser to determine the value of the work remaining.  If the appraiser comes back with a higher than expected estimate, the lender will cut back the draw request, leaving the borrower potentially scrambling to find another source of funds to cover all the draw costs and keep the project on track.

This type of unexpected surprise is also more common with traditional lenders than with private lenders and is one of the reasons that private lenders also tend to dominate the market for construction loans.

If you’re going to utilize traditional financing in order to get the best possible rates, make sure that you have a contingency plan to deal with the type of situtaton outlined above.  While there is no guarantee this type of draw funding problem will not happen with a private mortgage lender, the odds are a significantly lower due to the fact that privates do not tend to follow as strict a funding and disbursement process as do institutional lenders.

If you’ve got a construction project that’s gotten off track and requires additional funds, give me a call so I can quickly go over you options and then together we can try to figure out the best solution.

Click Here To Speak With Construction Mortgage Specialist Joe Walsh

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