For smaller projects where the amount is under $100,000, the construction financing can come from lines of credit, terms loans, second mortgages, or even credit cards. These sources of financing may already be in place or need to be acquired to fund the project. The key to these smaller project funding sources is that they are general use financing facilities that do not depend on the end value of the project to support the loan security.
For instance if you utilize an existing unsecured or secured line of credit for a $50,000 home renovation, the line of credit funding available is for general use and does not require any specific authorization from the lending source to allow it to be used to fund construction financing or any other expenditure you may have.
This can also be referred to as an unstructured source of renovation or construction financing.
At the end of the construction work, these short term financing sources will either be paid down individually as cash flow allows, or they will be refinanced into a longer term take out mortgage.
When the source of the construction financing IS dependent on the type of work being done, then it becomes a more structured form of construction loan that is provided in return for a mortgage charge against the property where the construction is taking place.
Structured construction financing, or construction loans take into account the property value prior to construction, during construction, and after completion. Construction mortgage advances are based on the work being performed increasing the overall property value at each stage of work, providing the security necessary to support the construction loan requirements.
The lowest cost form of construction financing is available through the primary and secondary banking groups.
In order to qualify for a bank construction loan, the property owner or builder will also have to qualify for the long term take out mortgage at the same time as banks are not interested in financing short term housing construction unless they are able to secure the long term mortgage as well.
Low cost financing equates to low risk, so the requirements of bank or institutional lenders with respect to construction financing can be considerable both in terms of what’s required to qualify and the administration process related to advancing construction draws during the process.
In order to take advantage of this type of construction financing, its best to plan well in advance and to have a contingency fund available if there are any delays in draw advances or cut backs in draw amounts which are not uncommon with bank construction mortgage programs.
Private mortgage construction loans are slightly more expense in terms of the cost of financing, but they are also more common in their utilization compared to construction mortgage programs offered at the banking institutions.
There are several reasons for this.
First, private lenders on average tend to have a more streamlined application and approval process than a conventional lender. This allows a commitment to fund to be secured in a shorter amount of time with potentially less conditions.
Second, private lenders do not provide take out mortgages and depending on the project, may or may not require that a long term mortgage in place prior to construction to pay them out. This can provide additional time and flexibility for the builder or property owner to shop around for the best available deal versus having to be accept the limited options available to them from the banking group prepared to provided the construction loan.
Third, while not without their own share of administrative challenges at times, private lenders, on average, are far more straight forward to deal with when it comes to construction mortgage administration requirements and draw advance administration. Private lenders tend to be individuals or small groups of more hands on lenders that can react to inspections and draw advance issues faster than a larger financial institution.
As you can see, there are some definite differences between these two forms of construction financing, making it necessary for borrowers to understand which will be a better fit for their particular project.
One of the best ways to approach the process of construction financing is to work with an experienced construction mortgage broker that not only has access to both institutional and private lenders providing construction loans, but who also has a track record of successful placement with satisfied customers.
Even once the funding is approved and in place, a construction mortgage broker can be an invaluable resource to assistance with any construction mortgage administration issues that may arise.
And if a long term take out mortgage is required, they also can assist with helping you locate and secure the long term mortgage programs that best fit your situation and financial requirements.
If you’re planning a home construction project or are in the middle of one, we suggest that you give us a call so we can go over your requirements with you provide construction financing options for your consideration.