We will share some of the hard truths involved in the process including; planning, financing, the building process, and the length and timing of construction. All of which can be complicated, this process is not for the unprepared!

Construction Financing Has Two Parts:

Draw Term: This is a process that aids in the funding during multiple construction stages to pay builders, contractors, trades people, and suppliers. Working through your draw term without complications can be tough. We are here to put in place a strategy to simplify your financing knowledge so you will be as prepared as possible.

End Term/Completion: Once the construction portion of your build is complete your normal mortgage will begin.

How Cash Is Dispersed Using The Draw Formula:

Money Advances: Typically, four or five draws happen over the course of the build and they happen in stages. This formula for draw amounts is based on your build’s completion percentage during each building stage.

Important Factors To Remember During This Process Are As Follows:

You will not receive cash advances to pay for the building lot, or the supplies that are needed. (You can apply for a separate loan to buy the lot.) You do not get a dollar-for-dollar match for everything involved in your build. The amount you borrow, and draw is predetermined and set in stone. Before getting a mortgage approval you must prove your ability to pay for the differences, and be able to handle timing discrepancies that may come up during your draw schedule. You will need to provide your builder, contractor, trades people, and suppliers what they are required to start or to continue working.

Your draw schedule is not something that can be negotiated. During the approval process your lender looks at your down payment, whether your loan is insured due to a low-down payment, and determines from there your draw schedule. If you have a budget with cash projections and timing requirements, it is important to manage your financial obligations during the entire process. There is a lot happening during this time and we are happy to provide you with a plan and template to help you stay on top of everything that’s involved.

Below Is A Typical Draw Structure:

40% Complete: First advance received. Weather protected building with a roof and locked access.

65% Complete: Second advance received. Plaster/drywall is complete, exterior walls complete, plumbing and wiring has begun and furnace is installed.

85% Complete: Third advance received. Bathrooms completed, doors are installed, kitchen cupboards are installed.

100% Complete: Forth advance received. Home is 100% finished and move-in ready.

Getting Paid On Percentage Complete:

When you’re getting close to a draw schedule milestone you're required to request a progress inspection. One of the lender's inspectors will visit the site to verify the progress using the bank's standard table. These vary depending on your lender. Once your draw amount is calculated, the amount will be given to your lawyer, and they will be required to pay your builder; minus the legal fees required for the builder’s lien hold back. Your lender will never deal with anyone working directly on your project; they will only communicate with your lawyer, who is responsible for the cash payouts. You, however, will be responsible for any amounts your payouts do not cover.

Below Is The Normal Formula For A Maximum Draw Amount:

Draw Amount = % Complete X Total Project Cost - Down Payment - Previous Advances

The total project cost will exclude the land if you own the lot. If the builder is the one supplying the lot, then land is included in the total project cost. It is important to stay on track and have a budget, but since the draw amounts calculation is formula driven and unrelated to the actual construction cost, there can be issues with the final calculations. Failing to understand the draw schedule happens to be one of the biggest issues many face with construction mortgages. Construction mortgages are riskier for lenders which is why you only get money once the work has been completed and verified.

You will need to prove your ability to cover cash advances before you are approved. It’s important that your lot be purchased beforehand, and that your construction team, suppliers and all the trades people involved be paid between draws. Some construction teams will agree to be paid later and work now, if not, you or the contractor will cover the cost.

New build homes can be harder to get an approval for, even with a plan in place. If you are lacking funds, or money runs out before the next draw, the project stops.

How do you plan properly so you don’t run out of money? It’s important to show your lender that you expect the unexpected, and you have a plan for it in place. Here’s some important things to think about to create a case:

Is the lot in your name?
Or will the builder supply the lot and transfer the title to you at first draw, whether it’s fully paid or not?
The builder has agreed to finance the project and use their own resources between draws.
Do you have an available line of credit, or available cash to provide the cost overruns between draws?
Do you have someone who is able and willing to stand behind your project if needed?

In most cases, you’re going to need to prove that you can fund roughly 1/3 of the total project costs; that also includes the land.

It is a risky proposition to build your dream home, for both you and the lender, and you need to prove that you can keep everything running smoothly throughout the entire process.

Seeing your dream home become a true reality is priceless. But it also takes a lot of work, preparation, commitment and on the flip, side can also save you money.

The Four Different Build Types:

Residential Home Builder: A licensed builder requires third-party home warranty insurance from the BC FSA and register your home to get a building permit. The builder is paid in stages, and is responsible for paying his suppliers and trades people.

General Contractor: Someone has hired to coordinate the project to its entirety. This contractor must have home warranty insurance, Register the property, apply for a building permit, and have the required licenses. The contractor, suppliers, and trades people can be paid by you directly or indirectly through the contractor.

Self Build: You are the general contractor; you hire qualified and licensed trades people. You have time, expertise, and industry contacts to complete the project in a timely fashion on a budget. You also must hold the financial resources to carry out the project and all it financial needs between draws.

Pre-Built: This is where you purchase a new home from a builder. Once completed, the builder gets paid upon possession. Though you do not need to fund the project yourself, or be bothered with over seeing the building process, you walk away with a new home. He will also have a regular mortgage instead of a draw construction mortgage.

Keep in mind that during the construction process, there are time limits placed by the lender to protect the lender if money runs out.

What do you need for a construction mortgage approval?

You do have to be able to qualify for a mortgage to start, with but then on top of that each build type will also have its unique requirements.

New Home Construction Preconditions:

After July 1, 1999, requires that all homes must be covered by the homeowner protection act.
Minimum home warranty insurance coverage and allowable exclusions are sent by legislation.
All construction must meet the local jurisdiction, Provincial, and national building code of Canada standards.

Draw Mortgage - Residential Home Builder:

There must be a signed purchase agreement.
If the land is owned, or there is an offer to purchase the lot. If the land is not owned there must be a deed provided.
You must provide all the construction plans; floor layout, exterior view, specifications sheet, cabinet types, hardware, flooring, and all finishing.
There also must be a new home warranty registration number provided.

Draw mortgage: Contractor/Self Build

Contractor Build: There must an agreement with cost estimates, completion schedule by stage, and payment timing expectations all included in a signed construction contract.

Self Build: There must be a progress advance worksheet that includes the timeline for each construction stage, when they expect it to be completed, and detailed cost estimates from various contractors.

Contractor Build: You must provide a copy of the contractor’s risk insurance policy.

Self Build: You must be able to show that you have construction knowledge, project management experience, as well as industry contacts.

Both Contractor/Self Billed:

Provide deed if the land is owned, or offer to purchase if the land is not owned.
Provide construction plans with floor layout, exterior view, specifications sheet, cabinet types, hardware, flooring and finishing.
Provide a copy of “course of construction” insurance coverage until the project is 100% complete.
Provide a copy of the building and development permits.

Pre-Build Completion Only Mortgage:

Provide a signed purchase agreement.
Provide construction plans; including floor layout and exterior view.
Provide the MLS feature sheet.
Provide a new home warranty registration number.

If your goal is to build your dream home, we can help you make that happen. It will be a complex journey, and we will be with you every step of the way.

Our expert mortgage experts will be your greatest advocates throughout this process; we are here for you all the way. We have knowledge, and years of experience that will make a huge difference in your entire experience. We will save you time, money, and a whole lot of stress. Give us a call, and we will find the best mortgage options for you.

We provide expert mortgage advice to both individuals and businesses. With over 20 years of experience we’ll ensure that you’re always getting the best guidance from top experts in the entire industry.