Financing New Construction
The process of financing new construction requires more at the start than a regular mortgage application.
When you have a borrower financing new construction, one thing to know is that their application needs to be thought of like their new-build: the foundation is going to be really important.
This means there will be more legwork at the beginning of the process because more is needed at the beginning to secure all the information and documentation that the lender will require.
And while it may seem complicated, financing new construction isn’t all that different from regular mortgage financing.
In addition to the standard information that a broker would gather, lenders will typically want:
- A fully costed budget
- Requested draw schedule
- Fixed price contract from a licensed 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
And bear in mind, the variety of the documents required will vary from lender to lender.
A couple things to watch for will be:
- Does the lender charge a stand-by 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 go over everything that will be required for the borrower. Then, you can literally use the list as a checklist to work through with your client.
Lenders who regularly finance new construction will generally be more than happy to work with brokers. That way they can ensure all the required steps are understood by the borrowers.
Lastly, 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 and replaced with lower cost conventional financing.
