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Commercial Construction Loan Financing Tips
Many brokers will encounter clients who require construction loan financing, some more than others. Commercial construction loan financing is usually required by developers and investors who purchase land that they would like to develop or are purchasing fully developed land in the form of a single or several ready to build lots. Land with an existing home or structure on it is most often referred to as “infill construction”. In the event that a builder is simply improving an existing structure including for example a top up (second storey) or remodelling, we refer to this type of construction as a renovation. All of these examples most often require construction funding and apply to either residential or commercial real estate.
There are several different types of construction loans. When a builder or developer acquires land for development they will seek out a land loan often combined with a facility for land development. The land loan serves to close the land purchase while the development loan serves to fund the planning and development of the land so as to improve it for greater use such as residential or commercial zoning from agricultural for example. Following the acquisition and initial development a developer or builder will require financing to service the land which includes the installation of sewer, water and hydro and will require a land servicing loan. The next round of financing is usually to a builder unless the builder and the developer are one and the same. The builder will require a construction loan to build either a residential or commercial building.
Here are some quick tips you may want to keep in mind if you are representing a client who requires development or construction loan financing.
Lenders who offer construction loan financing will always hold back 10% from every advance in accordance with the Construction Liens Act save and except an advance on land. Borrowers need to be made aware of this for budgeting purposes at the outset to ensure that there is no confusion in the future.
It is important that your client has a good budget that includes a detailed breakdown of hard and soft costs and includes the interest reserve in the soft costs.
Be prepared to use a quantity surveyor whose job will be to approve the budget on behalf of the lenders and provide reports on progress of construction to the lender that certifies every advance in accordance with the budget. For smaller residential construction loans some lenders will use an appraiser to report on progress.
In almost all cases, lenders will lend construction loans on a “cost to complete” basis. This means that the funding program will be advanced in progress draws and will also be subject to 10% holdbacks in accordance with the Construction Liens Act as previously mentioned. This ensures that there is always enough money in the remaining budget to complete the project.
The presence of a first mortgage that was obtained for construction purposes can create a challenge if your client plans to obtain second mortgage financing as the second mortgage lender would be required to postpone every advance under the first mortgage or construction loan that has priority on title.
Offering commercial construction loans can be very lucrative for a mortgage broker or agent. An opportunity to arrange this financing is an excellent opportunity to learn about how you can diversify the range of products you are able to offer to your clients. Either co-brokering the deal through an experienced broker who specializes in construction financing or working with a construction loan financing lender who is willing to educate you and walk you through a project is a great way to gain experience and to be able to offer this type of financing to your clients.
Stop Foreclosure – The Success of Philadelphia’s Residential Mortgage Foreclosure Diversion Pilot
It’s amazing how people come up with highly technical names for programs. Sometimes the most successful programs have the hardest to understand names. This is true for Philadelphia’s Residential Mortgage Foreclosure Diversion Pilot Program.
What is this program? Simply it is a program which helps people in Philadelphia who are facing foreclosure save their homes.
What is so great about the program? Its success rate. The program commenced in May of 2008. Mortgage modifications started to be made in June of 2008. At the end of 2008 78% of the people who had their mortgages modified through the program remained in their homes.
Why is this so great? The 78% success rate is the highest in the United States. At the end of 2008 statistics came out for the United States as a whole. Those revealed that in over 50% of the cases where mortgages were modified during the first quarter of 2008 the people fell behind on their mortgages within 6 months and were facing foreclosure again. So the program in Philadelphia is bucking the national trend.
The people in Philadelphia have developed an innovative and effective program for preventing foreclosure. Mortgage companies are required to meet with the people facing foreclosure. At these meetings they are required to negotiate a mutually agreeable solution to the foreclosure whenever possible.
Why is the program so successful? How did they get to the 78% success rate?
First, it is a mandatory program. Both the mortgage companies and the people facing foreclosure have to participate.
Second, it uses a very effective community outreach.
Third, it is easy for people facing foreclosure to participate in. They get the help they need.
Fourth, housing counselors work with the people facing foreclosure.
Fifth, there is a mediation process overseen by the courts.
All of these have come together to make this program far more successful than any other program helping people facing foreclosure save their homes. It is worthwhile to see how this program was put together. Can it become a model for other cities and states?
In Part 2 we will take a closer look at how this program was developed and why it is so successful.
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