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!

Click here to download for free

 

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

Need a Mortgage Approval. We Make it as Easy as 1,2,3!

Click here to get started

Written by:

MARC SHENDALE
Genworth Canada – Vice President Business Development
6 Mar

How to Turn Your Tips Into Real Estate Gold

First-Time Buyers

Posted by: Cody Rowe

Times have changed in Canada.

Serving and bartending are now sought-after positions that can allow the right person to create a career in the restaurant industry with pay similar, if not better than bank advisors, bookkeepers or construction workers

There is one question a lot of servers and bartenders have on their minds….

Is it possible to turn your cash tips, into real estate gold?

This can be difficult for one reason…

Because your tips may fluctuate you are treated like you are self-employed.

Don’t fret though!

That’s why we created this list of “must-do’s” for servers, and bartenders to use when planning for that property purchase….

Tip #1 – Start Claiming Your Tips!

Let’s be honest here.

A LOT of you will not claim your tips as part of your income when tax season comes.

If you want to qualify to buy a home, you need to have PROVEN income to be approved for a mortgage.

The more you make on paper, the more you qualify for.

Now how do you remember what you made each month?

Here’s a simple strategy to stay organized….

  • Buy an agenda, a calendar or download a calendar app
  • Write down what you make in gratuities every shift along with your hours
  • Add up your total tips for each month and write the total at the bottom of each month

Tip #2 – Only Make 2 Deposits a Month

Do you make a lot of small deposits at your bank? Stop that!

Here’s why…

Lenders will confirm your income is by having looking at bank statements to confirm deposits of a steady paycheck.

If you have 10 – 20 deposits a month, this is a nightmare for banks to confirm and appears inconsistent in their eyes.

Here’s a good rule of thumb:

Deposit your tips ONLY when you deposit your paycheck.

Tip #3 – Find Out Your Average Net Gratuity Per Shift.

We want to make your income appear as consistent as possible.

We can do that by calculating your Average Net Gratuity Per Shift and explaining that in your Job Letter.

[Note: If you want to see what that looks like, feel free to download and use our FREE Job Letter for Servers & Bartenders]

 

Job Letter for Servers & Bartenders

Use This Free Template to For Your Next Mortgage Approval

Click here to get started

 

Speak to your General Manager, and request to have this included in your Job Letter.

Tip #4 – Talk with Your Mortgage Broker BEFORE You’re Ready to Buy

A strong relationship with your Dominion Lending Mortgage Advisor can be one of your most valuable partnerships in real estate.

Set up this relationship early in the process before you start house shopping so you can get started on things like…

  • Fixing blemishes on your credit bureau
  • Establishing better credit history and boosting your score
  • Finding out what you’re pre-approved for.
  • Grants and programs you may be eligible for.
  • Saving for a down payment.

We hope these tips have helped pave a road for you.

Know a server or bartender? They need to know this so make sure to tag them when you share this.

Need a Mortgage Approval? We Make it as Easy as 1,2,3!

Click Here to Get Started

 

 

5 Feb

FOR RENTAL PROPERTIES, CASH (FLOW) IS KING

Investing

Posted by: Cody Rowe

Ask pretty much anybody about mortgages and the first, sometimes only thing they want to talk about is the interest rate. In my business as a Mortgage Professional, my job is to educate clients that while interest rate is definitely a cornerstone of your mortgage decision, it is not the only factor to consider when agreeing to sign a mortgage commitment. In many cases, the lowest interest rate does not represent an ideal fit, especially when the actual mortgage isn’t aligned with customer’s stage of life, priorities, or long-term outlook.

Rental properties are a prime example of mortgage situations where basing a decision solely on the rate is often short-sighted and in some cases detrimental to the long term viability of one’s investment.

Rental properties can be a lucrative way to diversify investments, build passive income and long term net worth. They can also be costly, rigid and very problematic if you don’t choose the right property, area, tenants and MORTGAGE PRODUCT. Like any investment you are going to do your research before buying – RIGHT? And you are going to take your time and screen potential tenants vs taking the first Kijiji reply from @fraudster.com offering a cash deposit higher than you have specified – RIGHT? I’ll leave that part up to you.

Where I come in is ensuring that the mortgage product you are using allows you the most flexibility on your payments and overall investment. The best way to ensure that your rental investment does not become a sucking vampire on your personal bank account is to minimize the cash outlays you are obligated to make.

Enter the Home Equity Line of Credit (HELOC).
In my 10-plus years of doing mortgages and owning investment property, the HELOC is far and away my favourite product for investment properties.

First & foremost – CASH-FLOW. HELOC’s allow you the option of making interest-only payments monthly. The monthly payments on a standard $200K mortgage using current 5 yr fixed rate of 3.39% for example are $987. Interest only payments would be about $650. That’s a cash flow difference of $340. Think of a vacancy – they happen. That’s $340 of your own money that you don’t have to pull out of personal savings to cover while your investment income is stalled.

Having the ability to scale back or minimize your cash outlays can be the difference between good and bad when it comes to an extended vacancy, renovation or unforeseen expense such as a repair or insurance claim.

This very feature has allowed me to take the time needed to properly screen potential tenants when I have a vacancy and not rush into leasing to the very first interested reply. I can tell you that one of the worst mistakes that can be made with a rental is to scramble to get tenants in so they can start paying rent only to find out you picked the wrong people.

HELOC’s also offer a number of additional features:

Fully open – imagine somebody comes along offering you top dollar for your investment property. A HELOC is fully open meaning it can be paid off immediately without restriction or early payout charges. You can accept the offer and cash out immediately without seeing profits eroded by penalty charges and fees.

With a standard mortgage you may have a payout penalty ranging from 3 months interest into the tens of thousands depending on mortgage type & institution (cringe if you have a fixed mortgage with one of the Big 5 Canadian banks).

Revolving – so you’re an investment property wizard and the cash you are making has allowed you to pay down the HELOC we set-up dramatically. You can use the available space on your current HELOC towards the purchase of another property. Keep your personal savings and investments in tact and don’t have to ask permission to access the equity. That’s the beauty of revolving credit.

The main (only) drawback to a HELOC over a standard, amortizing mortgage is that the interest rate tends to be slightly higher (about .50%). To me this argument rings hollow. Since your rental property is essentially a business, the interest that you pay on a mortgage is eligible to be written off for tax purposes. Given the strict criteria involved in qualifying for mortgages these days, I’m willing to bet most people with rental properties are already showing income that has them in an elevated tax bracket.

That means that every extra dollar of profit reported on tax returns gets annihilated by CRA. Sometimes increasing an individual’s interest expense actually helps them bring their reported profits on rentals close to breaking even and honestly that’s why we have accountants (SIDE NOTE: please use an accountant if you are going to play in the investment game).

Finding lenders who offer HELOCs on rentals isn’t easy, especially if you are wanting only 20% downpayment (80% LTV). Most lenders these days want more meat on the bone (equity) for rental properties. There are definitely good lenders out there doing rental HELOCs at 80% LTV.

That’s where a call to your trusted Dominion Lending Centres Mortgage Professional and the proper strategy can pay off in spades.

Written by:
SHAUN SERAFINI
Dominion Lending Centres – Accredited Mortgage Professional