Financing construction is very different from getting a mortgage for an existing home. For a start, lenders typically lend up to 80% of finished appraised value without requiring CMHC insurance. Interest rates are commonly set at prime plus 2%. With construction financing, your loan may be drawn down in stages while making interest-only payments until construction is complete. Completion for homeowners means that the house is 100% complete and has its certificate of occupancy.
Different lenders may have more or less the same number of ‘funding’ stages; the following is a common example:
1. Lock-up stage: foundation, framing, windows, doors, roofing, etc (approximately 40 % of funds)
2. Drywall, insulation, wiring, and plumbing ( approximately 30 % of funds)
3. Finishing: exterior and interior ( approximately 20 % of funds)
4. An additional advance may be requested to assist in purchasing the land.
5. Additional advances may be requested subject to an appraiser’s inspections to maintain sufficient cost to complete.
Lending for construction is usually planned for 6 to 9 months depending on the project and the institution. At each stage of funds being advanced, an appraisal and inspection of the property and a lien search is typically required. The goal here is to ensure that construction is following the plan as stated in the application.
Construction loans are ‘story’ loans. That means that the lender has to know the story behind the planned construction before they're willing to loan you money. To be successful an applicant must provide most lending institutions with the following:
- a complete set of plans
- specification of materials
- cost estimate for the proposed building
- a time table for completion
- an appraiser will examine site survey plans, construction plans, specifications and cost estimates in order to produce an appraisal on a completed construction basis
- a copy of all contracts relating to the construction is a must
This list is not exhaustive and will vary between lenders. This article is meant as an overview and specifics will vary between lenders. In writing the article I searched the internet for information, and I did not find much. The reason is simple, each project is specific and each lender adapts their practice to the local environment.
For more information you can contact:
Philippe Daigle - Your Kelowna and Westside Mortgage Expert