28 Apr

CONSTRUCTION MORTGAGE PART 2 – THE BUDGET, THE LOAN AND THE KEY POINTS YOU NEED TO KNOW

Investing

Posted by: Cody Rowe

Construction Mortgage Part 1 - Serviced vs Unserviced Lots

The first of our Construction Mortgage Blogs covered the basics of what you would need to know for this complicated mortgage type. In this second part, we will cover three key areas: The budget, the loan, and key take-away points.

1. The Budget

The budget is the most important piece of information that the lender wants to see. It should include “hard” and “soft” costs. There is usually “reserve” money set aside to ensure there is enough money in the anticipated event of over budget costs. The “reserve” money is usually 10%-25% cash flow based on the budget for the project. This is on top of the down payment.

This table denotes common soft and hard costs that should be included in the budget:

table01

 

2. The Loan

How the loan is Calculated

Lenders will lend up to a maximum amount determined by the guidelines of the individual lender. For example, based on the lender loaning up to 75% of the total cost (with 25% down):

Land purchase price (as is) Total soft and hard costs Total Cost (as complete)

$200,000 $400,000 $600,000 x 75% = $450,000 available to loan

Keep in mind, the lender will also consider the appraised value of the finished product. In this example, the completed appraised value of the home would have to be at least $600,000 to qualify for the amount available to loan. The appraised value is determined before the project begins.

As well, the client will have to come up with the initial $150,000 to be able to finance the total cost of $600,000. A down payment of $150,000 plus the loan amount of $450,000 = the total cost of $600,000.

Construction loans are released in draws (guidelines are based on the lender). NOTE – between Draws, there is an appraisal/progress report that is ordered by the lender. This is at the client’s cost. These reports are usually around $200 per report, depending on the appraiser.

Draw 1 – Foundation Draw The initial draw is usually based on the preliminary fees. Remember from the example in the previous page that the loan amount is $450,000. Foundation Draw – building the foundation Land purchase ($200,000 – down payment of $150,000) = $50,000 Interest Reserve ($30,000 or 9 months’ interest of the loan) = $30,000 Lender Fee (usually 1% plus any broker fees) = $15,000 Legal Fees = $3,000 Total first draw is $95,000 which leaves $355,000 for construction costs.

Draw 2 – Construction begins! Lock Up Draw – Framing is done and doors and windows can be “locked up”. Whatever amount of money was budgeted for the initial framing component of the project.

Draw 3 – Drywall Draw – You get your drywall up. Whatever amount of money was budgeted for the initial framing component of the project.

Draw 4 – Completion Draw: The Lender sends in an Appraiser to do a progress report to verify that the budget has been followed and build is complete. At this point, the lender will contact you to finalize a new mortgage (a “normal” mortgage) that will be based on the appraised value of the home. Once your building project is completed, we will be able to assist you in moving your construction mortgage to a traditional mortgage, utilizing the discounted rates that we have access to.

The lender may also require a project timeline. Typically, the lender allows a timeline of 6 – 12 months, depending on the lender.

3. What you should know?

  • Construction loans are usually fully opened and can be repaid at any time.
  • Interest is charged only on amounts drawn. There are no “unused funds”
  • Once construction is complete and project completion has been verified by the lender, the construction mortgage is “moved over” to a normal mortgage.
  • A lender will always take into consideration the marketability of a property. They will look at not only the location based on demographic but also the location based on geography. For instance, a lot that is in a secluded area where no sales of lots have occurred in the last five years and mostly consisting of rock face may not be a property that they are willing to lend on.
  • Depending on the lender, you may have a time-frame within which you need to complete construction (typically between 6 and 12 months).
  • Although we’ve described 4 draws, the lender can advance additional draws if needed (i.e. there is a time crunch to pay a vendor and you don’t have enough cash to cover the cost. Or there is unexpected expenses that have come up and you have to dip into your contingency fund (usually a 10% reserve determined by the cost to build).

Problems you can Encounter

  • You may go over budget and have to dip into the “reserve” fund as needed
  • You may have issues with project management not going smoothly. For instance, trades not showing up to do scheduled work.
  • Liens can be put on title throughout the construction project timeline which will delay funding for the next draw. Liens will have to be removed before new draws are released.

Delays in construction and depleted funds can wreak create havoc in a project. Make sure you are working with professionals that have experience and know how to troubleshoot when needed

Final Thoughts…

Construction mortgages are complicated. It is in your best interest to have a mortgage professional guide you in the step by step process of a construction mortgage. At Dominion Lending Centres, we have the expertise to show you how to set up your construction mortgage to fit your needs. We make sure that the costs that will cross your path will be taken into account and that you will borrow the required funds to build your dream home. Give us a call to discuss your options in building the house of your dreams!

Written by:

GEOFF LEE
Dominion Lending Centres – Accredited Mortgage Professional
28 Apr

CONSTRUCTION MORTGAGE PART 1 – SERVICED VS UNSERVICED LOTS

Investing

Posted by: Cody Rowe

Construction Mortgage Part 1 - Serviced vs Unserviced Lots

On several occasions we have had people ask us at Dominion Lending Centres about construction mortgages. Every lender has their own guidelines and rules when it comes to construction mortgages. That’s because there are many details involved in the process of construction, let alone the mortgage that actually funds it! Below is part 1 of 2 of what a construction mortgage entails and what you need to know when tackling this complex mortgage.

Construction Mortgages almost always start with raw land

Raw land usually comes in 2 forms: service lots and un-serviced lots*

Serviced Lots are defined as having:

  • Portable water-water that is safe enough for drinking and food preparation
  • Septic/sewer services-city connected sewers or a septic field
  • Access-a driveway, as rough or refined as it is
  • Hydro-connected to power
  • Natural gas (if applicable)
  • Need 25% to 35% down

Un-serviced Lots are defined as having:

  • Portable water-needs to be available
  • Septic/sewer services-not applicable
  • Access-(other) or not typical such as water access
  • Hydro-not applicable
  • Natural Gas-not applicable
  • No Agricultural Land Reserve**
  • Need 35% to 50% down

*guidelines depend on the lender
**land that is reserved for agricultural activity (ie. Farms)

Rates and terms of purchasing raw land

Serviced Lots usually have:

  • Maximum Mortgage Amount, depending on the lender
  • Maximum Mortgage Amortization, depending on the lender
  • Rates are usually a little higher than discounted rates (ie best discounted fixed rate plus 1%), but not always
  • Fees – usually a lender/broker fee, but not always
  • Terms – usually 1 thru 5 years

Un-Serviced Lots are defined as having

  • Maximum Mortgage Amount, depending on the lender
  • Maximum Mortgage Amortization, lesser maximum amortization compared to serviced lots
  • Rates are usually a little higher than discounted rates and higher than serviced lots (ie best discounted fixed rate plus 2%), but not always
  • Fees – usually a lender/broker fee and usually higher than serviced lots, but not always
  • Terms – usually 1 thru 5 years

How do you qualify?

  • You need to complete a mortgage application
  • You need to provide credit bureaus and income documents showing that you qualify for the amount of money you wish to borrow.
  • You need to provide a detailed construction budget.
  • You need to provide a title search (through your mortgage broker or lawyer)
  • You need to submit a copy of the purchase agreement, including all addendums and amendments.
  • Builder information and resume (if requested) and project contract
  • Full set of legible construction drawings scaled to legal size paper or smaller
  • HPO registration (Home Owner Protection forms or registration of new home)
  • You base the amount to be borrowed on the appraisal based on a completed project

You may need to also provide….

  • Copy of all construction contracts
  • Corporate financial statements (if applicable)
  • You need to submit a detailed summary of the deal, including how you are expecting to move out of the higher interest rate construction mortgage into a “normal” mortgage, depending on the lender
  • Copy of purchase agreement for the land purchase

These are the first steps to setting up and understanding a construction mortgage. There are unique traits to this type of mortgage as with any other mortgage. Remember, you should always consider calling a mortgage broker to help walk you through this complex process!

Stay tuned for Part 2 which will cover the budget, the loan, and key take points.

GEOFF LEE
Dominion Lending Centres – Accredited Mortgage Professional
16 Apr

How Emotional Homebuyers Can Lose Out On The Best Deals

First-Time Buyers

Posted by: Cody Rowe

 

Buying a home is a financial decision, but also an emotional experience.

Before we’ve explored every room, we often start imagining our new lives there. Where our furniture will go. The parties we’ll host in the open-concept living-dining space. The mornings we’ll spend at the breakfast bar overlooking the garden or skyline… When a home speaks to us emotionally, the fear of missing out on it can set in fast.

That’s especially true in a real estate market where multiple offers and bidding wars are common, where a financing condition can put you at a disadvantage, and where prices are at all-time highs.

According to the 2017 Genworth Canada Homeownership Study, 60% of first-time buyers were worried they might miss out on the “perfect” house. That can lead emotional homebuyers to act against their own best interests by, for example, forgoing important conditions, or paying more than they had budgeted.

There’s no need to lose the dream — you will host those parties — but you’ve got to take emotion out of the deal, and these strategies will help.

Assemble your entire team before looking at any property.

That means: interview experienced real estate agents with expertise on your desired neighbourhoods; consult a financial advisor to help determine how homeownership fits into your other goals (a wedding, saving for a child’s education, retirement planning, etc.) and establish a budget including “what-if” scenarios, such as a layoff or maternity leave; connect with us to help you secure a pre-approval, explain your options, and answer your questions here. You may be able to achieve homeownership sooner than you think. Find out how

Need Numbers Right Away? Download Our Mortgage Calculator!

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Get the names of 3 home inspectors. Call and introduce yourself now.

Many emotional homebuyers forego the inspection process in an effort to make their bid more competitive. That’s a risk. With 3 recommended inspectors on speed dial, you should be able to get a qualified professional to visit a property the day you want to make an offer. Your real estate agent is one source of referrals, or check with the Canadian Association of Home and Property Inspectors.

Don’t visit properties outside your price range.

Best-case scenario, you’ll walk away deflated. Worst-case scenario? You’ll bid on something you can’t comfortably afford. Stick to your homeowner budget (likely to be higher than renting, since it includes property taxes/maintenance fees, utilities, etc.) and practice living on it for a few months before you decide to make a purchase.

Focus on the things you CAN’T see.

The efficiency of the heating and cooling systems, the age of the roof, the state of the electrical… these matter most when it comes to deciding if a home is a good financial deal. Hardwood floors, quartz counter tops, and stainless steel appliances can be seductive, but they shouldn’t be a priority.

Surprise repairs and upgrades to fundamentals — like a furnace on its last legs, plumbing that isn’t to code, or uninsurable knob-and-tube wiring — could sink your budget. And if problems have been covered up, you might just have to rip out those magazine-worthy finishes and details.

There is no disputing that buying a home is a massive financial decision as well as an emotional experience. But minimizing emotions throughout your homebuying experience is a heads-up move that will ultimately benefit you.

For more tips on what you should know before you purchase a home visit www.homeownership.ca

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Written by:

MARC SHENDALE
Genworth Canada – Vice President Business Development