Institutional Construction Financing Quirks
“Understanding How Bank Construction Loans Work Will Allow You To Get The Most Benefit From Them”
Many times people are for lack of a better term obsessed with getting bank or institutional financing for all their requirements. And for the most part, cheaper money is always going to be preferred over the alternative.
But cheaper money is lower risk money, and banks structure their deals to minimize their risk, which can also restrict you in the process.
So to be clear, I am not stating in any way shape or form that there is anything wrong with seeking to finance your construction project through an institutional lender. What I am saying is that you should make sure you understand all the conditions that go with the funding in order to get the full benefit out of the lower cost financing you are seeking.
For instance, here are a few of the more common requirements that come with an institutional construction loan.
- Construction mortgages are only issued by institutional lenders in order for them to have the opportunity to add the longer term take out mortgage to their portfolio. To make sure that happens, the lender will require that you qualify for both the construction loan and the take out mortgage at the same time. If you can’t qualify for the take out mortgage, you won’t get the construction loan.
- Second, the construction mortgage, while only short term in duration, is typically written up under a 5 year interest term. If you utilize the bank’s take out mortgage, the pre-payment penalty associated with paying out the construction loan early will be waved. And with a construction interest rate significantly higher than the long term mortgage rate, you’re going to want to pay it out as soon as possible.
- Third, even though you can get approved for up to 75% of the appraised value of the completed project, the bank will only advance 60% to 65%, keeping the rest to fund the construction hold back. But at the end of the hold back period, the held back funds will never be advanced …unless you utilize their approved take out mortgage to pay out the construction loan.
There are some other quirks to institutional construction mortgages that can come into play depending on your situation and the institution you’re dealing with.
To find out how to make sure you’re getting the most out of a institutional construction loan for a home build, give me a call and we’ll work through all the requirements together.
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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