We get inquiries on construction mortgages constantly. This video offers a high level program overview – and covers the essentials if you are thinking of buying a lot and building:
Video Blog Transcription:
Hi everybody, its Rowan Smith from the Mortgage Centre. I want to talk to you today about construction mortgages.
A lot of people are looking at some raw land, lots available in the area. They are thinking to themselves it would be nice if they could buy the property, build the home they have always wanted, and put it on there.
They are familiar with hearing the five percent down rule — that that is the minimum down payment. They come and approach me and they want to get approval in those cases.
It is usually not going to happen. The person who is putting the five percent down, first off, five percent of what? Five percent of the lot, five percent of the lot with the home, the end value, or five percent of the lot plus the construction costs? It depends what they are trying to do.
Generally, if you are trying to do high ratio construction, that is anything where you are financing more than 80 percent of the cost of the property, you have to have enough income to service not only the debt, but also your living expenses during the period of time.
Most people are building the homes for whatever reasons. Whether it is tax efficient accounting, or whatever, they rarely seem to have that income if they are trying to build the property. My experience is that most construction mortgages you are going to need 35 percent of the end value in order for you to really get that construction deal done.
So if the home is $1 million bucks, you can look at having to put $350,000 of your own money into the deal. Now the way it works is you don’t get to borrow 100, 200, 300, 400, $650,000 and then put your money in. It is not the way it works. The bank will always want your dollars in first.
What is going to happen is they are going to finance, say 65 percent, or 70 percent of the land. They will advance dollars at that point. You will put up some of your money. Then, they will say OK, we have advanced… I am going to grab a number here.
Lets say the home is $1 million bucks and the lot is $200,000. So they are going to give you 65 percent of $200,000 to start with, so $130,000. You take that money, you have to come up with the rest. So you are putting in the 70 of the $200,000 lot.
Now what happens? You go and start your construction. The bank does not start advancing you the balance of the $650,000 that they are going to lend you. They make you put your money in first. Those initial construction costs are going to be yours, and you are going to cover them with your dollars.
Once you have the house to certain stages, at that point the bank will start to advance you money. So at drywall, or at lockup rather is usually the first stage, it is about 60 percent. Then there is at drywall, and then usually again at the end when the property is actually completed.
It varies from institution to institution and what percentage point they are going to make you complete the home. They will have one of their appraisers come through and just kind of qualify and say, “Yes, this much work is done. The remaining costs to complete is x amount of dollars.” The bank will then lend you release money at that point.
You usually have to be well enough financed to come up with cash up front so that you can afford the construction costs and the labor trades, then get the money owed at the end of the day. If you are thinking you are going to borrow the whole amount for construction, it is not going to happen.
If you have anybody that is looking for construction loans I can help kind of point them in the right direction. Let them know if their estimates of costs and their budget, and especially their capital usage and when it is going to be required is reasonable.
Give me a call. I am Rowan Smith for the Mortgage Centre.