CONSTRUCTION DRAW FINANCING

  

The following is meant to be a general guide to construction financing.  Policies, fees and interest rates will differ for each lender who offers construction financing.

 

Most lenders will require a complete package when submitting for a construction mortgage approval.

 

Eligible Purposes:

•·                     Purchase from residential home builder

•·                     Purchase from a contractor

•·                     Self-build home

•·                     Renovations or improvements of existing home where there are structural changes or costs exceed the lesser of:

            - 10% of current value or $25,000 (if conventional mortgage)

            - 10% of 'as improved value' or $10,000  (if insured)

 

Eligible Properties:

•·                     Owner occupied only

 

Land:

•·                     Lot upon which home is to be built must meet the lender's residential guidelines & must be fully serviced

•·                     If not fuly serviced, the cost to service must be included in the construction costs

  

Loan-to-Value:

•·                     Conventional:  maximum 80% of the lesser of appraised value or cost to construct (including land)

•·                     Insured:

            - Purchase: maximum of 95% of the lesser of appraised value or cost to construct

            - Renovation/refinance:   maximum 90% of the completion value

 

Income Confirmation:

•·                     Full income verification required

 

Required Documentation:

•·                     Residential Home Builder: 

            -signed Purchase & Sale Agreement

            -offer to purchase for lot (if not owned); deed (if land is owned)

            -construction specs or plans

•·                     Contractor / Self-build:

            -signed construction contract

            -list of cost estimates from various contractors & progress advance worksheet (for self-  build)

            -offer to purchase land or deed

            -construction specs & floor plans

 

Construction Costs:

When determining the total costs of construction, take into account the costs associated with the following:

•·                     land purchase

•·                     building cost

•·                     site preparation

•·                     finishings

•·                     soft costs (include non-building costs ie: interest property taxes, legals, permits)

NOTE:  for self-builds, the borrower must have additional resources or ability to carry an additional credit facility equal to at least 15% of the construction costs to cover overruns.

 

 

Advances:

•·                     borrower's solicitor to register the mortgage for the full authorized amount prior to 1st advance

•·                     maximum construction period is 1 yr from application date

•·                     funds advanced to solicitor (in trust) in a series of 3 draws (advances) when the construction has reached a predetermined stage of completion. 

•·                     4 draws will sometimes be considered

•·                     each advance requires authorization from lender / insurer

•·                     any encumbrances on the land must be paid & discharged prior to 1st advance (or with proceeds of 1st advance)

•·                     solicitor must complete a sub-search on property prior to each advance & title defects must be resolved by the solicitor & borrower before advances can proceed.

 

Advance Schedule:

•·                     First Draw:  construction at least 35% complete (Home is completely closed in or roughed-in.  Foundation, sub-floor, framing, sheathing, roof, roughed-in electric & plumbing.)

•·                     Second Draw:  Construction at least 65% complete (interior is completed to drywall stage (taped & finished), should include exterior completion & pouring of basement floor & heating installation.)

•·                     Third Draw:  Construction at least 97% complete (Structure fit to be occupied & have finished interior doors, floors, carpentry, painting, heating, plumbing, electrical, walks & driveway)

NOTE:  With 4 advances: first draw can be requested when excavation, backfill & foundation are complete - construction is considered 15% completed.

 

Lien Holdbacks:

•·                     Solicitor will be instructed to hold back a percentage to meet provincial requirements.

•·                     These funds are normally released after the solicitor confirms the construction lien period has expired

•·                     In Ontario the hold back is 10% for a period of 45 days.

 

Additional Documentation:

Solicitor will be required to obtain the following prior to releasing the first advance:

•·                     builders all-risk insurance assigned to lender

•·                     plot plan showing location of all buildings to be constructed

•·                     confirmation that all necessary building permits are in place

 

Solicitor will be instructed to obtain the following prior to releasing the final advance:

•·                     occupancy permit

•·                     new home warranty certificate

 

 For more information, please contact Anne Lok via email.