Construction Mortgages are fairly complex and more difficult than a typical house purchase or refinance because of  the inherent risks associated with lending on a home that is in the process of being built. It is considered a greater risk to a lender because it is significantly less marketable during the construction period.   Normally, lenders require a minimum down payment of 25% to 35% unless it will be insured by CMHC, Genworth or Canada Guaranty.   There are two types of construction mortgages, a 10 Year Home Warranty home built by a Professional Certified Builder or an Owner built home which requires a Home Warranty Exemption Certificate.  Lenders prefer a home built by a professional builder because they have actual costs from houses built previously and are experienced, but will consider an Owner built home if the Owner can prove that he has the experience and knowledge to build a home and provide a resume. Complete quotes from qualified trade’s people will be required for everything to complete the house if it’s an “Owner Built House”.   The attached form, known as a house costing sheet and quotes for all items need to be included for approval with an “Owner Built House”.  The costs will vary based on the quality of the house built, the size, the location and quotes from contractors can vary greatly.  It is wise to do your homework before starting the house.

During construction, lenders protect themselves and will only lend money based on the value of the home at the time, not on the future value.  This is called “Cost to Complete “and money is provided by a draw schedule.  There are normally four draws during construction:

1st Draw:              Land Only – Typically 65% to 75% financing of the land value

2nd Draw:             Lock Up Stage – Approximately 40% complete – Roof, framing, doors and windows are complete.  The building is weather protected (airtight, access secured).

3rd Draw:            65% Complete – Plumbing and wiring is started, plaster/drywall is complete, furnace installed and exterior wall cladding is complete.

Final Draw:          97% to 100% Complete – Kitchen cupboards installed, bathrooms completed and occupancy permit granted with the house being basically 100% complete.

Quite often, a fifth draw is required and most lenders will advance a fifth draw.

Most lenders have a hold back of 10% for each draw and this amount is not released until 45 days after 100% completion of the house.  Therefore it is important to make sure that you allow for a 10% contingency when calculating your costs to build the house.  Lenders like to see that the borrowers have some extra savings/investments of at least 10% over and above the amount required to build the house for this purpose and for cost overruns.

Please call me with questions at (250) 816-3130 or (250) 729-7099.

Estimate Sheet

House Construction Estimate Sheet

Elaine Peligren

Dominion Lending Centres Vanisle – Modern Mortgage Group

BREAKING DOWN THE 5 C’S OF CREDIT

While most people have heard of the three R’s of the environment – reduce, reuse, recycle – many aren’t aware of the five C’s of credit – capacity, character, collateral, credit and capital. While your credit score plays a big role in whether your deal is approved, there are other factors that are just as important.

Lenders assess your credit risk based on a number of factors, including credit/payment history, income, and overall financial situation. Here is some additional information to help explain these factors, also known as the “5 C’s”, to help you better understand what lenders look for:

CAPACITY

Can you afford the payments along with other living and credit expenses? We need to know if you can handle the debt and if you’ll be able to repay the mortgage loan amount as agreed. Your income is reviewed and we will crunch some numbers to determine your gross debt service (GDS), the percentage of a borrower’s gross income used to cover monthly payments associated with housing costs including utilities, mortgage payments, taxes, condominium fees, and pad fees when applicable, and total debt service (TDS) ratios, your TDS ratio is the percentage of your income needed to cover all of your debts including all of your GDS costs. Remember, we are able to use income from things like alimony, child support, disability income, and some lenders even let us include child tax benefits.

CHARACTER

As past behaviors predict future tendencies, lenders put weight on past payment responsibilities, how long you have been employed, and how long you have lived at your present address. Lenders look for clients that show stability and reliability. We need your whole story (divorce, health, etc), to allow us to make a more informed decision.

COLLATERAL

How marketable is the property you are purchasing? What is the condition of the home? Is it unique? How much money are you putting down? Lenders always need to think about the ability to pay-off the mortgage in the event of unforeseen circumstances. The property provides a way to recover at least a partial amount if you were to default on the mortgage. If you are weak in some of the 5 C’s of credit, lenders may ask for more money to be put down on the property so that their collateral position becomes stronger (reduced LTV – loan to value is a measurement used to determine the amount of capital required as a down payment, in addition to rate and terms of the mortgage).

CREDIT

Credit is one of the few instances where past performances are an indicator of future results. Your credit score carries a lot of weight when you apply for a mortgage. History tells us that the majority of clients pay their mortgage first, their car second, and the rest after. It is very important that you make all your payments before the due date on your statements. We need the complete story on any credit hiccups that your may have encountered so we can properly relay the story to our lenders.

CAPITAL

This is your net worth. It is assets minus liabilities. Are you in a positive position? Will you have access to any extra funds should you encounter any unforeseen circumstances. Typically, the largest form of capital is the amount of money that borrowers have invested in a property. Otherwise known as a down payment, lenders want to see how invested you are in a property before making a decision. Lenders want to know the source of the down payment before making a decision on approval.