Residential Construction Financing

house under construction

Building your dream home or doing renovations?

Looking for a new home that no one has lived in before and is just the way you want? Is the space in your current home no longer fitting your family’s changing needs?

Whether you are planning to build a new home, make an addition, major renovation, or finish the basement in your existing residence, a construction mortgage can help make your dream home a reality.

What is Construction Financing?

Construction financing is a short-term arrangement made to finance any real estate-related projects. To get started, the home or land owner will take out the loan to cover all the related costs of the project. This helps the project get started before a more permanent source of funding becomes available. At the end of the project, many people chose to refinance construction loan into permanent mortgage. For the lender, construction loans have more risk than regular loans so the interest rates are generally higher. A typical construction loan will last from 8 to 24 months. During this time, only the interest payments are required.

What you will need to provide to secure your construction loan?

Blueprints, architectural drawings, permit, and budget.

What costs are covered with a construction loan?

Land Value

If you need the funds to cover the purchase of the land, this can be done with construction financing.

Hard Costs

The loan will cover costs that are directly related to the building work being done. This includes labour, as well as the raw materials.

Soft Costs

These are the costs that are indirectly related to the project, which means that they arise as a result of something else. For example, this could include engineering fees, permit fees, and architectural fees. If the cost doesn’t directly relate to the contract but it does enhance the project, it falls into this category.

Contingency Reserve

Generally, you should add at least an extra 10% on top of the construction costs as a contingency. There are always unforeseen circumstances in any construction project. Orders may need to be changed and upgrades made along the way. If you find that it doesn’t get used by the end of the project, at least you had it there for security and peace of mind.

Allowances

After the actual construction, you want to have some money left over to make it make the home ‘livable’.

Total Costs

Taking all of the previous categories into account, you will come up with a total cost for the entire project. When the lender decides how much you can borrow, they will take the lesser of the total costs or the appraised value.

How will receive your construction loan?

Construction loans are given on a progress advance basis. The full amount that you need to borrow in order to complete your construction, is given to you in stages or “draws” as you reach various levels of completion.

If you already own the land you want to build on, a first advance is available as equity take-out. If you have not yet bought the land, a first advance is available to assist you with the purchase of a vacant lot.

Draw StageRequired Building CompletionConstruction Stage% of Loan Amount Advanced
1st Draw15% completeExcavation and foundation complete15%
2nd Draw40% completeRoof is on, building is weather protected25%
3rd Draw65% completePlumbing and wiring started, plaster/drywall complete, furnace installed, exterior wall cladding complete25%
4th Draw

85% complete

Kitchen cupboards installed, bathroom completed, doors hung20%
5th Draw100% completeReady for occupancy, seasonal and exterior work completed15%

Residential construction loan application process

Step 1

You will need to obtain the architectural drawings for your project. In addition to a floor plan, it must have the exterior, dimensions, descriptions of the materials, and more. For example, the roofing may consist of lightweight tiles, shingles, or a number of other materials, so this must be clarified. Once this has been given to the appraiser, they will decide on a value based on the specifications.

Step 2

An agreement will be made with a contractor for the complete project. Using the plans from ‘Step 1’, the builder should provide you with a quote and schedule. After you have obtained this, it should be kept together with the initial plans and specifications for the project.

Step 3

Your builder should create a detailed contract with all the costs broken down into a draw schedule. This should match up with the quote in the last step and this helps the money to reach the builder before the project begins.

Step 4

The lender will use a worksheet to assess all the costs in order to decide at the maximum loan amount.


Commercial Construction Financing

newly constructed office space

When it’s time to expand your business

Is it time for a new build or to expand your office, plaza, industrial or residential building? Maybe you’re a new business just getting off the ground, building your property from the ground up?

Starting or expanding your business can be an exciting time, but many businesses can’t afford to pay the high up-front costs involved.

If your future plans include constructing new facilities or upgrading your current building, it’s time to consider a commercial construction loan. Contact us to find a custom-made financial solution that works for your business.

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What is a Commercial Construction Loan?

A commercial construction loan is used to finance the costs associated with the construction or renovation of a commercial building. The funds from a construction loan can be used to pay for labour and materials for the construction of a new property, the purchase and development of land for a new commercial property, or the renovations of existing properties.

Commercial construction loans are different from other loans. Most loans are structured so that the you receive the full amount of the loan as one lump sum. Once the loan is received, you pay back the loan through scheduled payments over a set period of time. This is different from a commercial mortgage, which would have a monthly repayment schedule over a longer period of time, often 10 years or longer.

With commercial construction loans, the full amount of the loan is not received up front. Instead, the you will work with the lender to create a draw schedule. This means that partial amounts of the loan will be released as the project hits certain milestones.

For example, the first draw could be for the clearing and development of land. The next draw may occur when the foundation is poured. Another draw is released when the building has been framed, and so on.

As each milestone is completed, a lender will typically require an inspector to confirm that the work is completed before releasing the next draw. This will continue until all milestones have been completed and the full amount of the loan has been distributed.

What do you do when the project is done and the loan is due?

Once the project is complete and the full amount of the loan is due, instead of having to make one large payment, you can now apply for a commercial mortgage. The property will serve as collateral, and you can use the funds from the commercial mortgage to pay back the commercial construction loan. With the new mortgage, you will have more affordable monthly payments over a longer period of time.

What do you need to apply for a Commercial Construction Loan?

During the application process, the lender will evaluate your personal and business financials, your credit score, and other factors that will determine if you are approved and what your interest rates and terms will be.

Because construction loans are considered high-risk, you will need to provide a detailed business plan, which should include an overview of what your business does, financials to date, details about your current operations, and future projections.

You will also need to provide details about the project. This includes a complete plan with specs and designs. An expected project cost, including estimates for contractors, materials, and other expenses, must be provided with your application.

Personal and business financial documents will also need to be submitted during the application process. These include, personal and business tax returns, profit and loss statements, balance sheets, bank statements, income statements, and debt schedules showing current debt obligations. Documentation requirements will vary by lender.


Land Acquisition Financing

vacant land with for sale sign

Buying land for residential or commercial use

If you are looking to escape the city to build the home of your dreams, want to build multiple homes, a subdivision, or a commercial or industrial building, you'll probably need a land loan.

Securing the financing you need to buy your land is a lot more complex than applying for a mortgage or other type of loan. For one thing, there's no home or building to act as collateral for your loan, which makes it a riskier investment for a lender than an already established property.

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Here are four things to consider before applying for land financing for a new home.

  1. Your cash requirement to develop vacant land
    Lenders do not give you money in advance to purchase land or make deposits with builders. You will need enough cash to cover the down payment for the value of the land and new home.
  2. Will your property meet the criteria for financing?
    The property is the security for the lender. They want to know that if you fail to pay, they will be able to sell the property to someone else and recover their money. A property that doesn’t have services or an access road may be more difficult to finance. Also, the type of home you want to build will be a key factor in securing your loan. For example, it may be difficult to get financing for a manufactured or mobile home on a non-permanent foundation.
  3. Your experience to complete the project
    You must be able to prove to lenders that you have the experience to complete your project on time and on budget. They want to be confident that you won’t run out of money due to cost overruns or unforeseen event and the project will grind to a halt.
  4. You must be eligible to get a mortgage as if the home was complete
    You will need to show that you have sufficient employment income and credit to qualify for a mortgage in addition to your cash requirement.

Because each project is unique, there can be several ways to structure land acquisition loans to meet the requirements of the borrower. Contact us to discuss the land financing options that are available to you.