Sources for construction lending

It should be no surprise that construction lending is very different today from years past. The good news is that several financial institutions are lending compared to perhaps one or two in recent years.

Generally lending requirements appear to be reasonable in their requirements for approval. We seem to have learned that it is wise to require a reasonable amount of income and down-payment on a loan to help ensure the loan will be successful for both the bank and the homeowner.

Owners can choose to go directly to a bank, or to a mortgage broker to source construction loans. In my recent experience the best avenue for owners is to source their lending directly from the bank to save time and get the same terms as given by a mortgage broker assuming they are going to the same bank that the mortgage broker intends on selling the loan to.

For custom home lending, where owners have a builder build a home on their property, there are challenges with some lending terms. Terms vary by bank, most main terms are essentially the same for all banks. The challenges are surmountable, but do require owners to have a pool of funds separate from the construction loan to pay for items that banks do not promptly fund. Some of these include costs for early issue of permits, and paying for material delivered to the site but not yet installed. Banks no longer fund for material on-site but not installed which creates a difficult “catch-22” situation when balancing forward progress with how to pay for contractually obligated costs. Material on-site must be paid for in a timely fashion, and if the bank does not fund then the owner must cover the cost until the bank will fund. Of course the builder may elect to cover such costs, but this arrangement must be made early on for the builder to arrange a separate source of short term funds and for a reasonable compensation. Owners basically get 30 days of free money in the normal construction draw process, anything over that must be compensated just as banks are compensated for the use of their money.