Construction Financing
What is a construction Loan?
A mortgage approval is the primary building block to setting the foundation of your upcoming projects. There are a number of factors that determine eligibility as well as the nature of your loan.
Whether you’re planning a major home renovation or a small project, financing options to meet all your home improvement needs are available. I, Esi Ghassemi take the time to review your specific needs before recommending the best financing solution. Your best suited option depends on certain criteria such as the cost of your renovation, whether you need all the money upfront, or how much time you need to repay your loan. There is a wide range of loans that differ specifically to suit the project at hand.
- A small and personalized project can range anywhere from $500,000 to $1.5 million. Such loans refer largely to renovations or building a home.
- Larger projects consist of building subdivisions or neighbourhoods, and can vary from 5 to 50 million.
How do construction mortgages work?
Construction financing is similar to a second mortgage where the value of the property is of future value. This type of loan is usually interest only payments and is given out in different stages during the different stages of the completion of your home.
The payouts are referred to as “draws” on a progression advance basis as you move along in various levels of completing the construction of your home. If you do not own a land and are in the process of buying the land, the first “draw” is sometimes provided to help with the purchase of the land. If you own a land, then the first advance on your loan could be given out as equity take-out.
These interests only loans are short term lasting one to two years with a typical hold back of 15% per draw as security for the lender.
How many draws exist in a construction mortgage?
There are usually 4 stages of installments during the build of a home until it is completed or close to completion. A home inspector will visit the property during each of the stages to ensure that the progression is on schedule. The funds are released by the lender after the inspector submits a progress report to the lender notifying them of the progress. Below are the 4 stages of installments explained in more details:
Stage 1 is called “The Foundation Draw” that is released when a land is purchased and construction of the home has begun. This draw is only released when the land has little to no mortgage on it. If there is still a mortgage on the land the first draw is received when the house is about 35% complete. Therefore, you are responsible to cover the costs for completion of the first 30 to 50% of your house.
Stage 2 is referred to as “The Lock-Up Draw”. In this stage the funds will be received when the home is approximately 30-50% complete. This entails that the foundation is laid and the framing, windows and doors are installed. This is when you can “lock up” the house at the end of the day.
Stage 3 is called “The Drywall Draw”. In this stage, the draw will be paid out when the home is roughly 65% to 75% complete. Furthermore, at this stage the heating system is in place and the home is ready for appliances to be put in.
Stage 4 is referred to as “The Completion Draw”. This is the stage where the house is complete or near complete. This means that the electricity and plumbing is in working condition and the home is liveable. All permits and contracts have also been signed and completed.
Buying a land and building your custom home can be a big financial decision. Contact Esi Ghassemi to discuss the details of a new home construction before you make the final decision on your dream home.
Regardless of your vision, my team and I hold the expertise and the resources to aid you with your upcoming projects.
Frequently asked questions
Does the builder have to be warranty approved for me to be able to get construction financing? (e.g. Tarion)?
Most banks and institutional lenders require a warranty-approved builder for construction projects. Private lenders may view a warranty-approved builder favourably, but this is not usually a requirement. Private lenders will usually conduct additional due diligence, such as reviewing an executed build contract and/or requiring a cost consultant or project monitor during the project.
How fast can I obtain construction financing for my project?
Once we have received your completed and signed application, the process of obtaining construction financing for your project can take anywhere from 3 days to 2 weeks. We offer both Full Documentation and Stated Income programs, and you will need to provide a line item construction budget. The appraisal of the property, which takes 3 to 30 business days depending on the type and size of project, is also required. After the appraisal is returned, loan documents can be prepared for you to sign.
How much construction financing can I receive for my project?
Loan amounts may be advanced periodically (often monthly) for work that has been completed in the project. In some cases, such as when the project is straightforward or of a shorter duration, the lender may provide all the funds at once.
How are loan amounts advanced during the construction project?
Loan amounts are typically advanced in periodic installments (often monthly) for work that has been completed in the project. In some cases, such as when the project is straightforward or of a shorter duration, the lender may provide the full amount of the loan upfront.
How Do I Request A Draw?
Call us to arrange an inspection of your property, also known as a progress report. It usually takes 1-3 days for an inspector to come to your property. Construction funds are released in parts based on the approved line item budget. After a successful inspection, we can authorize the release of the draw, which will take 1-3 business days.
Do I have to pay interest on the entire construction loan?
No. You only pay interest on the amount you withdraw from the total loan amount.
Do I have to be a contractor, builder or developer to be approved for a construction loan?
Most lenders prefer applicants with past experience as a General Contractor for a construction loan. However, there are some lenders who will consider Owner/Builders and Investors, provided they will be using a licensed contractor or subcontractors during the construction process.
What is Future Value?
The Future Value of a property is determined by appraising it as if it were already finished, taking into account the estimated time of completion and comparing it to similar properties in the area.
How many inspections are required during a construction project?
On average, an independent 3rd party inspector is required to perform 7 inspections during a construction project. The number of inspections may differ depending on the type and amount of the project being financed.
What is the minimum credit score I need to qualify for a construction loan?
To qualify for a construction loan, most lenders prefer a credit score of 650 or higher. However, we can work with lenders who accept scores as low as 500.
Can I add the upfront costs into the mortgage?
You are responsible for all upfront expenses, such as cleaning the land, plans, permits and project management fees, and these costs cannot be included in the construction financing.
