Pay Dirt Series – Construction Financing

Construction financing isn’t really that different from regular mortgage financing.  There will just be more work at the beginning to gather all of the required information and documents that the lender will require.

In addition to the regular information that a broker would gather, lenders would typically want:

  • A fully costed budget
  • Requested Draw Schedule
  • Fixed price contract from a licenced builder
  • Course of Construction insurance
  • List of sub-contractors
  • Appraisal showing both the value of the bare land and the completed value of the home

The balance of the documents required will vary from lender to lender.

A couple things to watch for:

  • Does the lender charge a standby fee on un-advanced funds?
  • Is the mortgage fully open to prepayment?
  • Is the accrued interest between draws capitalized or does it have to be paid out of pocket?
  • At what point does the borrower have to start making regular payments?

Once you have found a potential lender for your file, the most important thing will be to have a full discussion about everything that will be required so that you can literally use it as a checklist to work through with your client.  Lenders who provide construction financing regularly will typically be more than happy to work with brokers to help the borrower understand all of the required steps.

Lastly, you’ll want to ensure that you have take-out financing arranged before construction starts.  This way the high cost construction financing can be paid out as soon as possible with lower cost conventional financing.