“Does Your Construction Financing Plan Include a Take Out Mortgage?”

Any construction project that requires financing will have two separate elements; a construction loan and a long term mortgage.  Construction loans are used to finance the actual project, but once the project is complete, the total outstanding balance of the construction loan needs to be rolled into a longer term mortgage instrument for the finished project.

In some scenarios, the lender or a lending group provides both forms of mortgage financing and approves the builder, buyer or owner for both mortgage products prior to the commencement of construction.

In other cases, the construction mortgage is arranged through one lender and the take out mortgage is arranged through a totally separate lender who may not have any relationship with the first lender.  Its also not uncommon for construction mortgage lenders to require that the borrower be pre-approved for a term out or take out mortgage prior to any funds being disbursed for construction financing.

But there also is the scenario where you get a construction loan approved without the upfront requirement by the lender to have the take out already secured.  This is a situation you need to be wary of.  Making the assumption that your project will have to problem securing longer term financing at the completion of the project may prove to be inaccurate.  Or at the least, you can experience approval delays that will extend the period of time the construction funds are outstanding.

Small delays are likely not a problem, but if you end up taking 6 months or longer to secure a proper long term mortgage to pay out the construction loan, you could be in some trouble.

First of all, depending on the construction related financing you arrange, the cost can be significantly more on a month to month basis as compared to a long term loan.

Second, the construction lender may have penalties in place for delays that will further increase your costs and erode your cash flow.

Third, if the term out process takes too long, the lender may take action against you and try to liquidate the property to get their money back.

For standard residential construction on new builds or additions, the probability of getting a take out mortgage for the rates, terms, and timing you require are going to be pretty high, most of the time.

But when you get into the construction of commercial, industrial, and multi unit residential projects that are larger in scope, the longer term mortgage market may be harder to pin down in the time period required.

The key here is not to expose yourself to this risk in the first place and to get everything in place, both construction loan and take out mortgage, prior to commencing the project.  That way, you can more accurately plan and manage the project to completion as well as your overall budget and cash flow without having to worry about incurring financing problems at the end of the construction project.

Click Here To Construction Financing Expert
and Mortgage Broker Joe Walsh

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