The purpose of the construction bridge loan is to cover off a cash flow shortage that exists at some point in the project.
This can happen at any point, but typically occurs in the last 20% of construction.
Some of the reasons for requiring a construction bridge loan include unplanned cost overruns, changes in project scope, and draw cut backs or delays with the primary construction lender.
Regardless of the reason, funds are required and typically there is an urgency to locate and secure the additional capital as soon as possible.
Because of the speed required, almost all construction bridge loans are provided by private mortgage lenders that have a focus on this type of lending. In terms of all available private lenders, including those that regularly fund construction projects, there tend to be only a small number that will provide these bridge loans due to the fact that a lender needs to be able to react quickly enough to meet the needs of the borrower.
Construction bridge loan requests that are made near the beginning of the project will fall in the 65% to 75% range for loan to value on the fair market value of the project at the point where the construction bridge loan is being made.
If a request is made for a construction bridge loan when the project is 80% complete or higher, the loan to value that can be advanced can be 85% or higher, depending on the lender’s assessment of risk related to the remaining work and their own assessment of the marketability of the completed project.
Construction bridge loans are typically secured by a second mortgage against the property, registered directly behind the primary construction mortgage.
Because there are relatively few private lenders that provide this type of financing in a timely enough basis, its going to be important to be working with a private mortgage broker who actively places these types of deals and well established construction bridge loan sources.
If you are in need of a construction bridge loan for an existing project, I suggest that you give me a call so I can quickly assess your requirements and provide private mortgage financing options for your immediate consideration.
Here, we are focused in on the latter and want to provide greater insight as to why a private mortgage could be a good fit for your home construction loan requirements.
First of all, a bank or institutional lender will only provide a home construction loan if it can be registered in a first position while a private mortgage lender will consider second mortgage security if there is sufficient equity in the project to cover the lender’s risk.
Depending on the value of the property, and how you have your finances set up to proceed with your home build, a second mortgage may work better.
Second, a bank or institutional lender will not typically advance any money until after the project is closed in. This will require the roof and all doors and windows to be properly installed. All the funding up to that point is your responsibility and an institutional lender may even require you to place part of the initial funding as equity into the project.
Once again, depending on the equity position you hold in the property where construction is taking place, a private lender can potentially advance you money at the start of the project as well as at the closed in stage of the build. This can make it easier to manage cash flow during the early stage of the project.
Third, private mortgage lenders for home construction loans tend to be more predictable with their draw advances in that the amount of funds that will be forthcoming to you to pay suppliers, trades, and contractors is going to be well known and predictable in terms of amount and timing.
With a bank or institutional lender, the draw management process can be much harder to predict as banks will have third party appraisers assessing the project’s completion prior to a draw advance, and if the assessor does not agree with your own declaration of work completed, the draw advance can be delayed or even cut back to provide the lender with greater comfort that the project is being completed properly, with sufficient funds available to cover off the remaining work.
If you are trying to arrange a home construction loan in Toronto or Southern Ontario and would like to better understand your private mortgage construction financing options, I suggest that you give me a call so I can quickly go over your requirements and provide home construction loan options for your immediate consideration.
The first additional benefit is the ability to compare and contrast how different sources of construction financing would suit your project.
For instance, there is a lot to consider between choosing between a bank or institutional construction mortgage and a private mortgage for construction financing.
Depending on the situation, one or the other may be the best fit for your project, but that can be hard to determine on your own without the coaching from an Ontario construction mortgage broker.
And if you choose the wrong source of financing, you can end up with a lot of otherwise avoidable problems later on in the project which will likely end up costing you more money to deal with and hopefully will not put the project in any type of jeopardy of being completed.
The second additional benefit that comes with using a construction mortgage broker compared to someone who mostly does residential or commercial mortgage placement is the assistance and support available to you during the project.
The draw management schedule can be hard to manage at times and having some experience to draw from and to serve as a go between with the lender at times, especially a lender that the construction mortgage broker has a working relationship with, can be invaluable in getting issues resolved quickly and money flowing when its supposed to for the intended amounts.
With construction financing, finding a source of money can be the easy part. Getting an approval in place and then successfully managing the draw management process is where the work comes in and having someone involved in your loan administration from beginning to end can become a very important asset to the overall project.
And if additional funds incremental to the primary construction loan are going to be required to complete the project, or a take out mortgage needs to be in place to pay out the construction project at the completion of work, an Ontario construction mortgage broker can work on getting these financing requirements arranged, allowing you to stay focused on managing your project on a day to day basis.
With construction financing, the keys are to get the right lender fit for your project, pay the lowest cost of capital necessary to complete the work, and avoid costs that can occur due to delays or disruptions in the draw advance process. All three areas are much easier to navigate with the aid of some professional expertise.
While a construction loan from a private mortgage lender is typically the most common type of construction loan issued, for those that want to try and take advantage of the lower rates offered from bank or institutional mortgage lenders that finance construction, a private construction loan can be a good second option as well.
Part of what I mean by second option, is more like option waiting in the wings or even a contingency plan if you will.
One of the challenges with securing and effectively utilizing a bank or institutional construction loan is being able to work through all the administration requirements that come with this type of funding. Even when things look fine on the surface, you can be on draw request from being in all sorts of trouble trying to get your institutional construction loan functioning properly.
This is why it can be a benefit to you to scout out both your best bank and private construction loan options prior to signing up for anything.
In that way, you always have a back up plan in the ready if required.
If you don’t want to go this far with respect to fully planning out an contingency for construction financing, then the next best alternative would be to look in to private construction loan sources at the very first sign of trouble with your bank construction loan.
Signs of trouble could include having trouble getting the first draw advanced, having draws reduced, and so on.
The good news about a private mortgage construction loan is that it can be put into place rather quickly, so even if you need to change horses right in the middle of a project, you can do this in about seven to ten business days, provided everything is in order.
There is potentially nothing worse in the construction world than having to scramble around to make cash flow work in the middle of a construction project when your time is supposed to be dedicated to managing the project.
Having both Plan A And Plan B in place will take a bit more of your time, but can save you time and money if something does go wrong with your construction loan provider sometime during the project.
If you’re in need of a construction loan for a project you’re planning, or one that you’re currently in the middle of, I suggest that you give me a call so we can go over your requirements together and discuss both bank and private construction loan options that are available to you.
This is even in situations where the individual or organization could qualify for a bank or institutional construction loan for either a residential or commercial build.
Especially in the case of builders and developers, where construction mortgage financing is going to be required over and over again, a private mortgage lending source can provide enough benefits to out weigh a potentially higher cost of financing compared to a bank or institutional lender.
These benefits start with the application process. In most cases, a private lender is going to have the same core requirements to support an application for financing, but the key difference is in the time it takes to get an application reviewed, approved, and funded. While a bank or institutional lender can take several weeks to finally get all the paperwork nailed down, a construction mortgage in many cases can be arranged in a fraction of the time.
And when you’re talking about commercial builders and developers, time is money. A more predictable application process also allows them to line up the start time for their project or projects more accurately without the worry of some bureaucratic delay from an institutional lender.
The second key reason why borrowers prefer a construction mortgage from a private lender is greater predictability with construction draws in terms of what will be advanced and when. And the more a builder or developer works with the same private lender, the more predictable the exact process for draw management becomes.
When you compare this is an institutional construction loan where draws can be reduced or delayed, the merits of a private mortgage construction loan can be considerable.
While the two above reasons for getting a construction mortgage from a private lender also apply to a property owner looking to build their next home, the next key reason is potentially the most significant to them as compared to a builder or developer and that relates to the lack of a requirement for an upfront take out mortgage to be in place.
For a home construction mortgage, where the borrower is planning to build and occupy the new home, most banks and other institutional lenders will require that the borrower have the take out mortgage arranged prior to construction, with the same lender.
Because most private construction mortgages do not require that you have a take out mortgage approved at the commencement of construction, there are a number of key benefits that potentially exist for the owner/builder.
First, by not being limited to the take out options provided by the construction loan source, the borrower can see if he can access a better deal somewhere else in the market.
Second, not having to deal with a take out mortgage right away provides more time to go through the long term financing process which may also lend to getting a better deal.
Third, most long term lenders look for favorably upon construction projects that are complete or near completion when offering rates and terms, so the longer you can leave the construction take out or long term mortgage process, the better your potential residential mortgage options may be.
If you’re in need of a construction mortgage from a private lending source, or would like to know more about this type of financing, please give me a call and I’ll make sure you get all your questions answered right away.
Construction financing is a specialized form of lending that does require a certain amount of knowledge to properly assess a financing application and to manage the risks associated with a construction project.
So even though most construction financing under $2.0M typically comes from private money sources, its a relatively small percentage of private lenders that fund these types of deals.
Taking it one step further, the private lenders that provide construction mortgages typically only work through construction mortgage brokers who know how to properly qualify applications and assist with the construction loan admin process as required.
As we’ve written about before, there are several key benefits of utilizing private mortgage financing for a construction project including a faster application and approval process, more straight forward and predictable draw administration, and greater flexibility with respect to arranging and securing a take mortgage if one is required.
At the same time, any type of construction financing can lead to problems if you don’t completely understand the terms and conditions of the mortgage, or they don’t correspond well with the requirements of the project.
One of the keys to successful construction financing is matching up your project and requirements with the right private lender.
There are many types of construction projects and several different approaches private lenders can take to fund a particular deal.
So its important to try to secure financing from sources that are most comfortable and competitive with what you’re trying to build.
A well established construction mortgage broker with a track record of locating and securing a variety of construction loans will not only get you connected to highly relevant private lenders, but will also be able to assist you with the draw management process and any other administrative issues that may arise during the advancement of the approved funding.
If you require construction financing for a project you’re planning or are in the middle of, I suggest that you give me a call so we can discuss your requirements together as well as go over relevant private mortgage construction options that can meet your needs.