Construction draw financing
February 16, 2024 | Posted by: Chad & Patty Southwell
If you can’t find your dream home, build it!
There are two kinds of construction projects. One is turnkey where the buyer does not own the home until it's complete, and secures a mortgage on the finished property. The other is where the home owner is the creative director and they initiate the build on their own lot. The customer is required to finance the build which is called construction draw financing. Let's look at what you can expect working with a mortgage specialist to build your own home.
Construction is an exciting process by which you are able to create the perfect space in the best location. It takes time and patience to see it through. Most mid-sized project could take a year or longer from plans, budget, permits, financing, construction, then completion. The most important aspects happen up front, finding the right builder and the best financing.
Construction financing is a niche product that very few banks and mortgage professionals do well. In fact, many banks have stopped this type of lending altogether because it’s time consuming and specialized.
We have extensive experience in construction financing, working with our clients from planning to completion. We present options, facilitate the loan and are in regular contact to overcome challenges along the way. Essentially, we advocate for our clients and work with the builder and lender for well over a year in most cases.
The construction draw process is as it sounds, mortgage funds dispersed in draws or advances based on the percentage complete as the home is built. A value is determined prior to starting by way of an appraisal of the land, plans and budget, and this same evaluation is used throughout the process.
Aside from the normal mortgage approval criteria, an ideal construction client would own a lot free and clear of any financing, and have additional funds available for overruns. We normally start with a detailed conversation to introduce ourselves, get to know our clients and discuss the overall project.
Next step we collect the following:
- Letter of employment and recent paystub;
- Recent Notice of Assessment from CRA;
- Deed for the land;
- Budget;
- Plans;
- Permits to date;
- Existing mortgage and property tax statement (or rental details if applicable); and
- Application and credit consent.
We hire appraisers; schedule inspections; work with the lawyer on registration and funding; coordinate with the general contractor; and, overcome any unforseen issues along the way. Working with an independent mortgage professional assures the client access to an accountable expert on off hours from start to finish.
In a time of housing shortages, building is an excellent option. Making sure the right team is behind you is critical to a smooth and enjoyable experience.
