In our continuing series on building your own home, today I’m pleased to present an article about financing your build written by my favourite local mortgage broker, Michelle Reichart with Invis. Thanks for your contribution Michelle!
About 5 years ago I helped my brother-in-law build his dream cottage on a beautiful lake up north; at that time both families really got along great. We have been going to the cottage for years, we always laughed and had fun, how hard could it be to build his dream house: get a mortgage, build the house – not that hard, right? NOT!
If you have not been though this process, you could start drinking now as it can be very stressful! On the other hand, if you deal with the right mortgage consultant who has been through this process several hundred times now, it will take at least one of your many stresses away.
Construction loans are very different from loans on existing structures because they require a lender to understand the story behind the planned construction and the lender has to be comfortable with the plan before they are willing to lend on the project. Story telling is one of the things I learned when I lived in Brooklyn NY so this part of the project was easy for me.
Unlike a transaction involving an existing home, a new home construction loan requires that the value of the completed home is determined ahead of time. To help the lender and the appraiser you will need to have answered to the following questions:
What is going to be built or constructed?
What materials are going to be used?
How much will the materials cost?
How much did the land cost, and what is the land worth today?
How much will be spent on permits and the building plans?
Who is the builder or contractor?
Is the builder reputable? Do they have experience building this kind of structure?
Does the builder have a provable track record?
Standard documentation is also required; as it is in any other real estate deal.
Construction loans are usually variable rate mortgages, or interest only mortgages, in order to provide the lowest possible financing cost during construction. The contractor and the lender will establish a draw schedule based on stages of construction. There are usually three draw stages but this depends on the individual lenders requirements.
1. Before the first advance is made everything up and including the foundation needs to be complete.
2. Before the second advance is made, all exterior and interior components need to be complete.
3. Before the third advance is made 95% to 97% of the house needs to be complete. Also an occupancy permit needs to be obtained.
In each stage the lender will hold back 10% in case the contractor registers a lien on the property.
The interest on the mortgage is only charged on the portion of money that has been advanced at the different stages. Another variable in construction loans is if the land has been purchased ahead of time, it can be considered, equity for the purposes of the construction loan.
Most homeowners will convert the construction loan to a fixed mortgage product once the home is 95% to 100% complete.
As you can see I only touched the surface of what is involved with a construction loan, but the bottom line is I want to make this project fun for you with less stress. This is truly something I love to do and it can be a fun process if you have the right people involved on you project.
Oh, by the way, the cottage up north: each night as we sit by the fire pit and look up at the BIG monster that we constructed and we laugh, we laugh hard! This year I plan to sit by the fire and say hey, want to build another one next door? Stay tuned!
Part 1: Building A Home In The Collingwood ~ Blue Mountain Area: General
Part 2: Building A Home In The Collingwood ~ Blue Mountain Area: The Land
Part 3: Building A Home In The Collingwood ~ Blue Mountain Area: Construction
When it’ s time to buy or sell real estate in the Collingwood, Blue Mountain or Georgian Triangle area, contact Marg, an experienced and competent Broker who is ready whenever you are!