A construction loan is a specialized mortgage product. It provides the financing that’s necessary before and after the structures are built. Here’s how one of these is put together.
These are made up of a percentage of what is the expected value when the project is completed. This value comes from what’s called an upon-completion appraisal.
This appraisal takes into account several different aspects like what kind of structures are being built. Information can be derived from the different finishes used as well as the project plans.
Construction Loans and Local Marketplaces
The value is based on a comparison of other sales in a local marketplace.
Here’s an average. A construction loan facility is around 60 to 75% of the end value that’s expected.
Here’s how that would work.
- Builders looking to buy a property for 900 K and then build a brand-new 2500 ft.² home. The expected budget and cost for the project is 800 K. The property should be worth 2.5 million once it’s completed.
- The construction loan would equal 1.56 million. That’s 70% of what’s expected to be the end value net HST
The loan gets broken down.
- The acquisition would total $675K which is 75% of the purchase price
- the construction costs would total 800 K which is 100% of the projects projected hard costs. These numbers don’t include the HST.
- There is an interest reserve of 85K. This is an estimation of the amount of interest that gets charged over the term of the loan.
If there is a shortfall, it becomes the borrower’s responsibility to come up with the extra money. The process starts with the borrower applying for the loan. They need to submit project timelines, plans, as well as financials for construction loans.
