Building a new home can mean a lot of great things for you and your family, including the opportunity to live in the home of your dreams; to save money compared to buying a prebuilt home; and the sense of accomplishment and satisfaction that comes with it.
However, financing the construction process can often be difficult and time consuming. As licensed mortgage brokers, our job is to remove stress and make it easier for you to realize your dreams.
First of all, consider there are two parts to construction financing.
Part 2 is easy. Getting started and through part 1 without scars can be tough.
During the draw term, money will be advanced in stages based on the work that has been completed to the draw date. The mortgage lender will normally allow 4 or 5 draws for the borrower (you), and the draw amounts at each stage are driven by a formula based on the percentage of the project that is complete. It is important to understand:
When a draw schedule milestone is about to be met - say the Excavation and Foundation are complete - the borrower requests a progress inspection. An inspector/appraiser for the bank visits the site and confirms for the bank the percentage complete using a fairly standard table such as in the example form below (form varies a bit lender-to-lender).
Based on percentage complete, the draw amount is then calculated and disbursed to your lawyer, who then pays your builder on your behalf (less a builder's lien hold back as required by law). Some borrowers get a bit confused thinking simply that the bank deals directly with the builder. In fact, the bank deals with and advises your laywer only, who then disburses the money with you making up any shortfalls.
The maximum advance or draw at any stage is typically calculated as follows:
Draw Amount$ = Percentage complete TIMES the total project cost* MINUS your down payment MINUS advances already made.
The calculation and money available is formula driven and not related to the actual cost to get to that stage (so don't go over budget!)
It is important to fully understand the timing and amount of the draws before you get too excited about building, as failure to do so will lead to a world of grief and pain for everyone. The point is worth repeating: a lender will NOT give you money for the lot nor work yet to be completed! Someone has to pay for the lot, then keep the builder, suppliers and tradespeople happy between draws. That 'someone' is either you or the builder, or the tradespeople have to agree to work now and be paid later. If you don't have enough money to start or you run out of money before the next draw (hence the trades won't work) or the draw amount is not enough, the project grinds to a halt.
* when you own the lot, the total project cost excludes land. When you are relying on builder to supply lot, then total project cost includes land.
Table: sample progress inspection form for calculating percent complete
As licensed professional mortgage brokers, we know exactly what it takes to qualify you for a mortgage and we do more than just get you a great mortgage at a great rate, we will show you the way, too.
So, as part of the mortgage approval process, the borrower must prove that no-one is going to run out of money between draws. Everyone needs to know how the cash will flow before you even get started. Proving you won't run out of money can be accomplished by documenting that:
Types of Builds
The following describe how a borrower might choose to get a new home constructed:
*Lenders will put a time limit on the construction phase so that they can cut their losses if you run out of money.
Borrowers will need to qualify for a mortgage as it relates to standard Income, Credit and Equity lender requirements. Further, there are extra steps as they related to the property.
Draw Mortgage - Residential Home Builder
Draw Mortgage - Contractor/Self-build
Pre-built Completion-Only Mortgage
If you would like to discuss whether financing a new construction build is feasible or desirable for you, please feel free to contact us and we can help make sense of all the above and estimate the draw shedule for you.