Mechanics Of A Construction Mortgage
“How Is A Construction Mortgage Arranged Compared To Other Types of Mortgages?”
From a mortgage registration point of view, a construction mortgage is exactly the same as any other type of mortgage instrument. It can also be in first, second, or third position, depending on the situation. The key aspects of a construction mortgage over a conventional mortgage is the manner in which the lender assesses the borrower request for financing.
With a conventional mortgage, the property value is determined at the outset of the process and used to establish the amount of mortgage financing that can be provided. With construction financing, the initial property value is going to be important as well as the ending property value.
The starting point for a construction mortgage request assessment by a lender is to look at the existing property value where construction is going to take place. The existing property value and equity is essentially the initial down payment for the mortgage. The lender also completes, or gets completed, a post construction appraisal to determine what the value of the property will be after all the work is completed. With the beginning and ending numbers in hand, the initial equity in the property is assessed to see if it is sufficient to cover the lender’s risk. If the initial equity is insufficient, then the borrower will be required to self fund the initial construction work up until such a point where the owner equity in the property is sufficient for the lender’s program.
In most cases where the borrower or applicant for a construction loan has insufficient equity in the property at the outset of construction, the lender will require the borrower to fund all costs up to the completion of the first draw as its been defined. If the initial work is completed according to the requirements of the project and meets the approval of the lender’s third party appraisers with respect to increasing the value of the property as required from the outset, then the lender will be prepared to consider advancing funds to cover the remainder of the work.
I use the work “consider” in that at each stage of completion, the project will be assessed by the lender or their third party representatives to determine if the work is completed meets the requirements of the project and that there is sufficient funds remaining from the construction mortgage approval to complete the remaining work. If in the lenders determination the work is incomplete at the time of a draw request, or that there is more work remaining to complete the project than funds available in the mortgage approval, the draw request can be denied, delayed until the work is adequately completed to that stage of construction, or cut back requiring the borrower to invest further capital.
The key aspect of the process is that a construction mortgage gets advanced according to the completion of work that follows a predefined plan that adds value to the property at each step of completion.
Click Here To Get More Information On Construction Mortgage Financing
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