The Construction Mortgage Funding Process
“Before You Accept a Commitment From a Lender To Provide Construction Financing, Make Sure You Know Exactly What Will Get Disbursed and When”
When you’re getting ready to accept an offer for construction financing from an institutional or private lender, make sure you read through the commitment document carefully with respect to what costs will be covered in the draw request and how the hold back will be managed.
Starting with the hold back, institutional lenders will retain the hold back portion and typically not advance it at the end of the lien period. So even though the total approval for construction financing includes the hold back portion, it will never be actually advanced unless their is a claim against the project. Therefore, do not count on receiving these funds at the end of the project.
Private lenders can be very mixed on advancing hold backs. Some privates will retain the hold back to protect their own interests, but still advance the hold back portion once the 45 day lien period has expired without any claims being made. Other private mortgage lenders will advance the hold back portion with each draw, placing the responsibility with the borrower to manage the hold back liability.
In terms of the construction costs, another sometimes tricky item to look for in the commitment is payment of GST. When you’re dealing with a general contractor, the lender will be paying them directly and may have a policy not to fund the GST portion. If you don’t know this at the time of signing up for the construction mortgage, you can be left scrambling for additional cash flow to pay the GST to the builder when the draws come due.
If the information is not listed out in the mortgage commitment, make sure to go over the draw process and exactly what costs may not be covered as well as how the hold back allowance will be managed.
Getting a funding surprise in the middle of a project can cause immediate cash flow problems that can lead to delays and of course additional costs.
This is another reason why it makes good sense to utilize the services of a construction mortgage broker so that these types of funding requirements or restrictions are clearly known up front and proactively dealt with so that there aren’t problems down the road.
Click Here To Speak With Joe Walsh, Your Construction Mortgage Broker.
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