Thinking of Building? – Construction Loan Tips

Building a home is a complex process that involves multiple professionals including builders, lawyers, appraisers and lenders. To make sure this all goes smoothly, you want to find a mortgage broker who understands the construction process as well as the complexity of the mortgage procedure.

Required Documentation for Construction Mortgage:

–          Copies of all quotes

–          Plans and House Specs

–          Confirmation of the builder’s New Home Warranty

–          Offer to Purchase for land and Copy of Title to prove ownership as land must be owned before construction begins

–          Full blueprint appraisal will be requested by the lender with 4 additional inspections at different stages of construction. All are done at the clients cost

 There are 3 main categories of new construction financing:

–          Completion Mortgage – Buying a newly constructed home

–          Self Build – Building a house yourself

–          Progress Draw Mortgage – Hiring a Contractor to build for you

For a completion mortgage, you purchase your home brand new and pay through way of mortgage when the build is 100% complete.

For both self builds and using a contractor, you will require a Progress Draw mortgage. Funds are advanced in intervals as the house is being built. There are usually 4 draws, each requiring an inspection which will detail the percentage of completion prior to advancement of funds.

These 4 draws must follow certain completion stages:

–          First Advance: excavation, foundation , slab, beams, columns, joists and sub-floor

–          Second Advance: backfill, framing, sheeting, roof roughed in, electrical, plumbing, insulation & vapor barrier, roughed in heating, heating equipment and exterior doors & windows

–          Third Advance: exterior finish, basement floor, interior doors, interior wall and ceiling finish

–          Final Advance: finish floor, complete electrical (including fixtures), complete plumbing (including fixtures), finish carpentry, painting, site work & improvements

Draws will be issues based solely on the appraisers determining percentage complete on inspection report. For example, if the property is valued at $300,000 and the appraiser indicates that at the first advance 9% of the build is complete, then the first draw payment would be as follows:                    $300,000 x 9% = $27,000

Features of a Construction Mortgage:

–          Buyer owns the land that the house is being built on

–          4 draws/advances of funds

–          Verification by an appraiser in the form of a report completed at the end of each stage

–          Down payment required upfront – the land value cans sometimes be used for down payment

–          Interest is charges during construction, varying from lender to lender. Typically at Prime + 2-4% with a time frame of completion of 6-9 months

It is important to keep in mind:

–          You must qualify with the lender for 15% over the blueprint appraised value to cover any possible overages.  Ex.  Value  = $300,000 x 15% = $345,000

–          Ensure you have additional funds available as you may be required to pay any short falls in payments to the contractors during the draw/advance process. These monies will come back to you upon completion of the project.

Finding a mortgage broker who is experienced and knowledgeable with construction mortgages will benefit you through the building process. An experienced broker will walk you through all the steps and assist with any hurdles that may come up along the way.

If you have any questions on how one of these items may affect you, please call us. It is important to get it right!