Construction Mortgage Financing
Below is a general guideline as lenders have different requirements.
Funding (Progress Draw)
Funds are advanced at intervals as home is being completed – typically in the following order:
Draws will be issued based solely on Appraiser’s Percentage Complete Inspection Report
Required Documentation
Hints and Tips
Solicitor: It is important to note that a Progress Draw requires a Solicitor
Progress Inspection Report: Each draw requires a Progress Inspection Report, which details
the percentage complete prior to the advancement of funds. The broker will be responsible to
contact the appraiser to order the inspection report. They will then forward this on to the lender
who will manage the draws after receipt of the Inspection Report.
Interest on Draws/Advances: Interest is charged on all amounts when advanced and are
invoiced, then debited from the clients account monthly. During construction clients is making
interest only payments.
Final Advance: The final advance will not be released until the final inspection confirms
completion; the final mortgage documents have been signed by the client and returned to the
lender by the Solicitor.
Lender Fees: Typically lenders charge a 1% fee on construction mortgages.
Commitment Fee: Client will be required to pay a commitment fee upfront to the lender– this
could range from $500 to $1000 or more. This fee is non-refundable if the client decides not to proceed.
Cost Over Runs: Typically all lenders require a 10% lien hold back to cover cost overruns -
meaning the lien amount is held back as the draws go out. Some lenders require an additional
10% of funds upfront. Once this has been depleted and there is still an overrun – the project
should be very near completion.
2nd Mortgage: This would be the last resort to cover a cost overrun deficit, and the most costly
to the client as it is very risky for a 2nd mortgage lender.
Upon Completion
Once occupancy certificate has been issued the home is deemed to be complete. All funds have
been advanced from the construction mortgage. The construction mortgage can then be
converted to a standard mortgage and proceeds of mortgage used to pay out the construction
mortgage and release any liens on the property.
- Financing for the purpose of building a new house
- 1st mortgage charge
- The minimum down payment required depends on the appraised value or cost to construct, whichever is less. Funds must be available at the time of application and client may be required to have additional resources available for cost overruns – 10%.
- Typically the loan to value on the land portion needs to be 50% – Equity or Down payment
Funding (Progress Draw)
Funds are advanced at intervals as home is being completed – typically in the following order:
- First Draw- If client is purchasing the land – typically to 50% of land value.
- Rough In – 35% complete. Survey is required by first draw, typically roof is on.
- Intermediate / Lock Up – Construction at least 65% complete when interior is completed to the drywall stage (taped and finished), this should include exterior completion, pouring of the basement floor, and installation of heating
- 100%- Final Occupancy /Completion – Construction at least 97% complete. The structure must be fit to be occupied and have finished interior doors, floors, carpentry, painting, heating, plumbing, electrical, walks, and driveways.
Draws will be issued based solely on Appraiser’s Percentage Complete Inspection Report
Required Documentation
- Written employment and income confirmation
- Proof of down payment or equity
- Signed contract with builder and all addendums - cost to complete
- Offer to purchase for land or a copy of title if already owned and details of any charge registered against it
- Full Appraisal
- Plans/ House Specifications
- Fire Insurance Certificate
- Third party warranty information
Hints and Tips
Solicitor: It is important to note that a Progress Draw requires a Solicitor
Progress Inspection Report: Each draw requires a Progress Inspection Report, which details
the percentage complete prior to the advancement of funds. The broker will be responsible to
contact the appraiser to order the inspection report. They will then forward this on to the lender
who will manage the draws after receipt of the Inspection Report.
Interest on Draws/Advances: Interest is charged on all amounts when advanced and are
invoiced, then debited from the clients account monthly. During construction clients is making
interest only payments.
Final Advance: The final advance will not be released until the final inspection confirms
completion; the final mortgage documents have been signed by the client and returned to the
lender by the Solicitor.
Lender Fees: Typically lenders charge a 1% fee on construction mortgages.
Commitment Fee: Client will be required to pay a commitment fee upfront to the lender– this
could range from $500 to $1000 or more. This fee is non-refundable if the client decides not to proceed.
Cost Over Runs: Typically all lenders require a 10% lien hold back to cover cost overruns -
meaning the lien amount is held back as the draws go out. Some lenders require an additional
10% of funds upfront. Once this has been depleted and there is still an overrun – the project
should be very near completion.
2nd Mortgage: This would be the last resort to cover a cost overrun deficit, and the most costly
to the client as it is very risky for a 2nd mortgage lender.
Upon Completion
Once occupancy certificate has been issued the home is deemed to be complete. All funds have
been advanced from the construction mortgage. The construction mortgage can then be
converted to a standard mortgage and proceeds of mortgage used to pay out the construction
mortgage and release any liens on the property.