Deciding On a Construction Financing Lender
“When You Have Multiple Construction Financing Offers From Institutional Lenders, Which One Do You Choose?”
Ok, so you’re construction project is strong enough to attract multiple bank or institutional construction financing options.
Good Stuff.
But now you have to decide which option to take?
And how do you decide?
Is it all about the interest rate and lender fees?
This is a hard question to answer in an absolute sense, but I will start out by saying that’s its definitely not all about the rate.
Sure, we all want to pay the least amount of financing costs for anything that requires third party debt financing. But a construction financing commitment, especially on larger projects, will have a number of terms and conditions to consider by the borrower or builder.
For instance, what is the proposed draw schedule and what is the exact process for verifying draw amounts and meeting the requirements of the all important first draw?
Does the project owners have any available cash to deal with any draw short falls or cut backs imposed by the lender?
If advances are required against the property in its current pre-construction state for site or infrastructure development, what will be required to get the advance issued and how long will the process take?
A very important and many times underestimated consideration is the bank or institutional lender you’re working with, the people that will be administering your mortgage, and the organizations processes, procedures, and reputation related to the construction financing of similar projects. If the lender has a tough reputation related to draw requests, a cheaper interest rate thrown out to win the business may result in significantly higher overall costs if any incremental sources of bridge financing end up being required to offset draw reductions and/or draw advance delays.
The people involved in administering the mortgage are not an insignificant part of the process either. I would even take it one step back to the people you’re dealing with at application stage. The larger the institution, the more likely you’re going to be working with a front line marketing person who is going to be big on promises but short on lending authority. So before you start leaning towards one particular lender, make sure that you actually have a commitment in hand that will bind the construction mortgage lender versus a thinly disguised letter of interest or intent or term sheet that has more outs than a 9 inning baseball game.
This is also why its important to work with a construction mortgage broker with some gray hair (probably caused by working through lots of these types of deals) as determining what the best overall offer is for a given project can be difficult to determine, especially if you’re not working through this every day.
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About the Author Joe Walsh
I'm a Toronto Mortgage Broker that arranges mortgage solutions on residential and commercial real estate property. With over 30 years of mortgage financing experience, I'm able to quickly assess your financing requirements and provide relevant solutions for your immediate consideration. Joe Walsh Google+ YouTube Channel