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.