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Construction Financing
By Jane Barrow
Many new homebuyers are considering the option of building the home themselves as opposed to buying directly from a builder. It's an opportunity to have the features you want in a home built to your specifications. The process of financing a "self-built" home is vastly different from the mainstream mortgage financing process. The construction financing is done in the form of a line of credit or a loan at usually 1% or 2% above, prime rate or the one, year fixed rate. Only after the building is complete can a standard mortgage be placed on the property. There are fewer lenders in the market willing to lend on this type of transaction, as it requires specialized, underwriting and risk management, to some degree. Below are the highlights of the self-built funding process. Your chosen lender's criteria may vary slightly from the outline below.
The initial step requires you to provide a set of blue prints and specifications prepared by an architect or engineer. The plans must be accompanied by a complete cost breakdown of the project. The lender will then provide the information to an AACI or CRA designated appraiser. The appraisal is done using the blueprints, specifications and the building lot to determine the value of the home, after completion. If the estimated value of the finished home meets the lenders expectations and all other criteria such as your creditworthiness, are in line, the loan will be approved. Here's where many lenders differ in their lending criteria. Some lenders will expect the building lot to be fully paid with your own money prior to releasing any funds. Others will provide financing to purchase the land as well, but will charge a higher rate for the loan.
The construction on your new home should start approximately 45 days from the approval and should be completed within 6 months. Typically, the loan will be advanced in four stages and usually only after the your own equity is used first. A progress inspection is required prior to each advance to determine if the property has been completed to minimum requirements. The first stage of the advance is at the completion of the foundation. The foundation is inspected prior to backfill and if satisfactory, the first advance is made. A portion of all the advances will be withheld to satisfy guidelines of the Mechanics Liens/Construction Liens Act. This holdback is to satisfy any liens that may be placed on your project by any tradesmen alleging that they have not been paid for their services.
The second advance is upon completion of the roof, exterior walls, wiring, insulation and roughed-in plumbing and prior to completing the drywall. Stage three and four are interior complete and building complete, respectively. Once you're new home is complete you can apply for a standard mortgage to replace the construction financing. If you're in need of a CMHC or GEMI insured mortgage you will be required to provide a copy of the builders New Home Warranty Unit Enrollment Number.
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