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.
Dominion Lending Centres Vanisle – Modern Mortgage Group