Undertaking a huge construction project for the first time is overwhelming, and let’s be honest, pretty daunting. Besides the amount of time it takes to finish and the possibility of unforeseen complications, there’s the thought of having to spend extortionate amounts of money that for most people seems totally out of reach. Though you may consider a construction loan, there’s a good chance you don’t even know where to begin when it comes to borrowing funds for a large development project. Here are a few of the basics about large-scale construction loans to get you started.
To begin, you should acknowledge a few things about construction loans that may differ from other loans available. The first is how crucial it is to present a well-developed construction plan. It’s likely your project will be monitored as lenders will be expecting work to wrap-up on schedule, so repayments begin promptly. That said, you’ll also be asked to provide a construction timetable before you get started, and you must ensure your contractors are following it closely.
Once you’re approved, you’ll usually be given a bank-draft or draw schedule that follows your stages of construction. For each withdrawal, your lender will likely have someone check the progress of work to confirm you’re following your timetable. Generally, you’ll only be required to make interest payments during your construction period but you should always review details like that before signing any documentation.
Remember, even if your construction is moving along according to plan, machine breakages, worker illness or simply bad weather may halt progress and require extra funds. It’s important from the get-go that you add allowances for these unforeseen circumstances into your timetable.
When your project is complete, meaning a certificate-of-occupancy has been issued and your contractors have been fully compensated, your loan will normally roll over into a mortgage.
Keep in mind, if your project entails purchasing land or a house, and building anew or rebuilding, financial institutions will only cover 75% of the original purchase cost of the property and 75% of your construction costs. Though Great Pacific Mortgage (the full-service brokerage I work with) matches the 75% coverage of the original purchase, we’ll lend up to 100% of the construction costs.
You may have noticed in your online research that finding lenders for construction loans is difficult. The search engine results are sparse, to say the least. As well as being more uncommon than your standard property mortgage, construction loans are high-risk for institutions, often shying away from marketing their services. This is where a mortgage broker can come in handy. Though many brokers focus on serving residential mortgage clients, I have plenty of experience and industry knowledge to work with you on your dream renovation or development project. Every individual has different financing needs for their unique endeavours. I have connections with a variety of lenders and am able to mortgage-shop to get you financing that suits your needs. Get in touch today for more information on what I can do to help you reach your construction goals!