Builder mortgage discussion
Feel free to respond with questions if you are about to embark on the adventure of building your own home (or having one built for you).
There are dramatically different ways of financing your brand new build.
1) You can save and build it yourself. Don't laugh, I know a few folks who built their new home over time. They bought material when they could afford it and completed their own construction. They have to meet building code and pass inspection, so this is obviously not going to be everybody's method of getting their dream home built. If you find yourself running short of cash, you will most likely need to use a private mortgage firm (arranged by a mortgage broker). Banks have a strict policy regarding the finance of partially built homes and while they will do the financing when the home is complete, you need to get a temporary private construction mortgage to help you get the home finished.
2) You can find a builder who will build you a home from their blueprint selection. In some cases the builder is well established and will build the home for you, with as little as 5%-10% deposit (up front). Before you put down your deposit, you need to get pre-approved for your mortgage. The construction might take up to a year, so the rate is not necessarily going to be the one available today. You don't want to place your deposit and then try and find a mortgage, because if you can't get the financing you need, you forfeit your deposit and the builder sells your home to somebody else. Most banks will pre-approve you for your mortgage, but you will need to lock in your rate 120 days prior to completion. There are a few bank branches who will hold today's rate for 12 months. However, if the construction goes into overtime, you will get the rate that exists at the time of completion.
3) You can choose to have your home custom built. You now need to contact your mortgage broker to discuss the need for both construction financing and completion financing. If you plan on using high ratio financing through CMHC (minimum down payment) you will need to involve the bank's underwriters before construction begins. They have many rules that they need to follow to stay qualified under CMHC guidelines. Schedules for building and timetables for draws are strictly adhered to.
The bank may automatically include completion financing at the end of the construction period. This does simplify the process for all concerned.
4) You can do a self-build through the bank. In this case, you need to get your financing arrangements done before you put the shovel to the ground. That means construction financing and completion financing. The difference here is the CMHC rules are going to place you under the same timetable as a regular builder. So line up your trades and make sure you have an experienced construction supervisor looking after the build schedule. You will also need to get your own Home warranty insurance. All new home construction needs new home warranty type insurance and it will probably cost you close to $2500 for the one time premium. All new home builders are faced with this expense too. The New Home Warranty folks will want to have their inspection team view the project periodically. Once the construction is at least 95% complete, CMHC will allow the bank to fund your long term mortgage (completion mortgage).
5) You can finance the construction loan through a private mortgage lender. The advantage is a lack of red tape and some flexibility on the construction schedule. Private lenders can let you draw down as you need funds. Some only charge for the outstanding funds (some charge for all funds from day one). If you use a private lender, you can avoid a CMHC premium. If the cost of building is $300,000 (including lot) and the final value of the home is $400,000, you're sweat equity is 25%. You can now qualify for a conventional completion mortgage and avoid any CMHC premiums. The downside is that the private mortgage rates are higher and they will charge you a lender's fee. The broker will also need to charge a broker fee, because private lenders normally do not pay a finder's fee to the broker. If the build is efficient and you get everything built on schedule, you will still save money.
Due Diligence items to do before signing the construction contract...
-Check with the Better business bureau to see how they rate your builder, or contractor.
-Quickly interview the neighbours to see what their opinion of the area is. They might point out a parking nightmare problem or loud noise issues.
-Check the internet for any news stories about your new neighbourhood or builder
-If you have time, have your lawyer review your construction contract before signing. All contracts are slightly different and you want to know the pitfalls.
- Make certain your financing is approved (or pre-approved for a completion mortgage).
- Private construction draw payment schedules are usually negotiable. Let your broker know what kind of payment schedule works for you. Most of the time interest is brought current when the next draw is taken.
- Make sure your accounting allows for a 10% construction holdback. Once the project is inspected and complete, these funds can be released by the lender's lawyer.
- If you run into overtime on the build, most lenders will give you a time limit and then complete the construction themselves. This cost either comes out of the holdback or is tacked on to the total mortgage.
