Construction Mortgages: Draw, Completion, and Purchase Plus Improvement

Have you considered buying a house to renovate or building your own home from the ground up and wondered how a mortgage can cover that? In this episode, Len discusses the three types of construction project mortgages (Purchase Plus Improvement, Completion, and Draw Mortgages), how they’re different, and what they cover. After listening, you’ll have a good grasp of which mortgage you’ll need to apply for in your specific scenario along with an introduction to the specific terms involved. 

Len further breaks down the requirements that lenders are looking for from applicants in all three construction mortgage cases. There are many details that home buyers must be aware of, from how much down payment is required to who the contractor is to ensuring the right paperwork is filled out to account for all the costs associated with a build or renovation. This episode is a great introduction to the possibilities a construction mortgage offers, along with the key factors to be aware of in the process. 

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• X: @Brokers4Life

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Transcript 

Len 00:02

Welcome. My name is Len Lane and I am the founder and president of Brokers for Life Inc. and we are Dominion Lending Centres in Western Canada. The topic of our podcast will be about what we consider to be Real Life Mortgage Solutions. 

Len 00:20

Welcome back. This morning, we're going to talk about construction mortgages. That lovely thing that happens when you're wanting to build a house, whether that's with the builder, or if you're renovating an existing property, or if you're going to build an entire house yourself, the fact that you'll probably need private lending money to do that. So what exactly is a construction mortgage? Simply put, it's a loan specifically designed to finance the building of a new home or a major renovation to an existing property. Unlike traditional mortgages, construction mortgages cover the cost of construction and are often dispersed in stages as they progress. 

Len 00:56

Today, we'll talk about three types of mortgages. So yes, Purchase Plus Improvement, Completion Mortgage, and Draw Mortgages. So let's start with the simplest one. And that would be a Completion Mortgage. Sounds just like it is where if you have a fixed contract with a builder, we only need to put down a down payment by percent, minimum, probably some I hear are asking for 20. But then they don't take any other money until the actual house is completed. So several things that don't happen, compared to what we'll talk about later as a Draw Mortgage, is that the builder carries the cost of the build on their own books, it's most likely built into the price of your house. And when you finally get possession, that is actually when your mortgage begins to take place. 

Len 1:43

Draw Mortgages, on the other hand, are a little bit different. So a Draw Mortgage is basic like that, the word draw means that they take money from the lender during the construction process. Draw Mortgages provide funding in stages. As the construction progresses, this type of mortgage is constructed to align with the building phases to ensure that the builder gets paid for completed work at each stage. They are suited for borrowers who want a hands on approach, I guess you don't have too much say in the construction itself. But you will have seen it go up, and as you go up, you'll see that they draw money on the mortgage. And that is where you will have to start to pay interest. Now again, some builders build this into their purchase price rather. And then it's paid by them or reimbursed to you if you pay it first. So a couple of different ways, a couple of purposes, right? That's for construction, new home major renovations, up to 95% on a primary residence and 80% on rentals. Majority of it is done in five-year terms. The biggest difference between completion and draw is that draw, we will lock the rate into the mortgage before the final stages are completed. And the two programs that we use ATB and Servus, they will actually lock in your rate at that first draw can be good and bad news. But if the house, the rates go down, which we're hoping we'll see that here shortly, it's good to have it fixed, you know what's going to cost and you'll know what the interest cost will be all the way through your construction. 

Len 3:16

So the other one we talked about a little bit was Purchase Plus Improvement. Purchase Plus Improvement was designed for you to buy a house and then do work to it after you've taken possession. The limit was $40,000 for quite some time. And that was, usually, only you would only get that if you had the money to do the work and or someone to do it for you. And it was only paid at the end when the work was complete. We now have lenders who will go to $100,000 and allow you to do draws. So if you're doing a large renovation, it can be set up and whatever you need the bathrooms done, you get $15,000, if carpets all done you get another $15,000, all the way up to $100,000 is what they're working with these days. So quite a bit of difference in what happens there. 

Len 04:05

Probably the next thing that is happening is that you will see if you want to actually build your own house, you need private money, most likely. It's a little different setup, and it starts with having to have quite a bit of equity in a property already so that you can see at least 20% down payment, whether that's in the value of the land or in money that you've already done. They work on a little different kind of process. Obviously everything would have to be put into a budget. I just looked at the budget this morning, and the budget has 60 items in it that you would need to get a quote for, so a fair bit of legwork to do. We've done quite a few of these in the countryside where we used a private lender to build, help build the house with their money because the banks don't want you to build the house they want the builder to build the house. You have to be responsible for getting a new home warranty, which is about $10,000. So there's a few costs up front that need to be in place. Mortgage rates will range from eight and a half to 11%. Really, lenders always have, private lenders always have a fee as well of two or three percent. And of course, because there are private lenders, we have to charge a fee as well. 

Len 05:22

Now, with that said, they do have a lot more flexibility, land purchasing, you know,they’re up to 70% of the value of the land, in some cases, depends where it is at the foundation stage. They would fund another 15%. At the lockup stage, which is when the house is framed and the windows and doors are in basically, they would do another 45% When you get the drywall, they would do another 65, pre-completion draw would take you to 80% of the purchase. And then the home needs to be 97% complete before they would do the final draw on it. And at 97% in most parts of Alberta, I believe you can get a possession occupancy permit, which is also required. So two things that happen there, new home warranty is on your own, and any builder that was building a house for you on a draw or completion mortgage, they would have already had a new home warranty in place, right. 

Len 06:15

So here's kind of the completion package that you need for a private lender build. Complete application package, obviously credit income CRA notice of assessments for all the borrowers, for corporations or self-employed borrowers the most recent account prepared year-end financial statements, evidence of enrollment in newer morti. As I mentioned before, some lenders will accept a certificate of exemption, and you still have to pay for that as well, I don't think it's quite as much. The reason for that is if they have to take over the home, New Home Warranty needs to be in place for anything built after 2014. So if they can't get a warranty certificate after the house is standing because none of the inspections would have been done right. Now confirmation of sufficient funds and equity to complete the construction, fully exit copy, an executed copy of the land or lot purchase agreement, any existing mortgage details that may need to be paid out. Because you can get land finance, do that through ATB and again, depending on where it is it can be 50 to 75%. 

Len 07:19

So, it's you're gonna need you're building plans upfront, specifications, and issued building permits will also be needed. So detailed line item budget, which we provide for you we've had, some of our private lenders have their own, we have one that a builder friend of ours did many years ago when I was in that industry. And it's very detailed as far enough. I haven't had any of the private lenders ask for their own after they've seen mine. Who's going to be in charge of your project? Are you the general contractor, are you going to be the one who's going to be following up with the trades, which is, you know, maybe like herding cats, but because they're doing all kinds of projects all at the same time. So you have to be prepared that you're going to have to spend some time on it, you know, and make sure that things are getting done, righ? Copies of a municipal inspection completion to date that will happen at the end. Depending on the project scope, a Value Survey or engineering report may be required. So, there's a lot of items that need to be taken care of when you're building your own house. I know everybody says they want to do it, but I have never… I have never had anyone say that they wanted to do a second one. Let's put it that way. The other part that you may be considering is a modular home, you can do these projects yourself. But it requires having the money upfront to do all of the other legwork. So then that legwork, especially you're in country lot you may be looking at actually putting in a road and culvert gas might be to the property line. But gas needs to get all the way to the house. Those are expensive. Electricity needs to be run in from the road probably, septic systems and drilling wells and doing all that other fun stuff on a real construction project is very time-consuming and really needs you to be on top of it and getting everything ready because when the house shows up, the house shows up.

 

Len 09:16

Two things that we've found with some of the pre-construction houses or pre-built houses, I guess, is that they want to be paid before the house goes on the foundation. That's where the sticky part becomes, you know, the lenders that want to give you money, and the guy with the house once wants to get paid. So Sagen, which is one of the insurance companies we’ll be talking with them in a couple of weeks. It has made it so that you know if credit is good, everything else is in place, that they will pay for the house. We allow the money to be left out for the house before the actual before it goes on the foundation or on the steel pilings or whatever, whatever it's going to go on. So a lot of things to consider in the country. If you haven't ever built a house out there. It is definitely a lot more things that need to be considered. So working with a builder, usually pretty simple, pretty straightforward. We just need the offer to purchase, obviously, your own credit and your application. But the offer to purchase specifications and the floor plan is basically all that's needed for the completion or a draw mortgage. And of course, the two different types of where interest is paid, whether it's paid at the end. It's always built into the house somewhere because the builder is either using their own money, which costs them money, and or they're using the draw money, which you get to pay the interest for. But again, they may have built that into their budget and just reimburse it to you as you get it paid. 

Len 10:42

So, anyway, happy house hunting, it's springtime here in Alberta. So we're looking forward to seeing a lot more construction stuff come along. Of course, the new government program kicks in, in August, where you can get 30-year amortization on a new house. The catch for that is that they've upped the ante on the CMHC. If you go to 30 year amortization, they've now raised the CMHC percent at 5% down to 4.75%. So one hand, they can with giveth and CMHC taketh away on the other side. So, anyways, have a great day. Thanks for checking in. 

Len 11:18

Thanks for listening today. I hope you found the information that we provided to be useful in your mortgage journey. And remember, you can always find our associates at www.brokersforlife.ca/associates. Have a great day.

 

What is Real Life Mortgage Solutions?

Mortgage Solutions for the every day Canadian mortgage consumer. Are you thinking about becoming a mortgage broker learn first hand what you should look for in a brokerage and what you need to be successful.

Len 00:02
Welcome. My name is Len Lane and I am the founder and president of Brokers for Life Inc. and we are Dominion Lending Centres in Western Canada. The topic of our podcast will be about what we consider to be Real Life Mortgage Solutions.

Len 00:20
Welcome back. This morning, we're going to talk about construction mortgages. That lovely thing that happens when you're wanting to build a house, whether that's with the builder, or if you're renovating an existing property, or if you're going to build an entire house yourself, the fact that you'll probably need private lending money to do that. So what exactly is a construction mortgage? Simply put, it's a loan specifically designed to finance the building of a new home or a major renovation to an existing property. Unlike traditional mortgages, construction mortgages cover the cost of construction and are often dispersed in stages as they progress.

Len 00:56
Today, we'll talk about three types of mortgages. So yes, Purchase Plus Improvement, Completion Mortgage, and Draw Mortgages. So let's start with the simplest one. And that would be a Completion Mortgage. Sounds just like it is where if you have a fixed contract with a builder, we only need to put down a down payment by percent, minimum, probably some I hear are asking for 20. But then they don't take any other money until the actual house is completed. So several things that don't happen, compared to what we'll talk about later as a Draw Mortgage, is that the builder carries the cost of the build on their own books, it's most likely built into the price of your house. And when you finally get possession, that is actually when your mortgage begins to take place.

Len 1:43
Draw Mortgages, on the other hand, are a little bit different. So a Draw Mortgage is basic like that, the word draw means that they take money from the lender during the construction process. Draw Mortgages provide funding in stages. As the construction progresses, this type of mortgage is constructed to align with the building phases to ensure that the builder gets paid for completed work at each stage. They are suited for borrowers who want a hands on approach, I guess you don't have too much say in the construction itself. But you will have seen it go up, and as you go up, you'll see that they draw money on the mortgage. And that is where you will have to start to pay interest. Now again, some builders build this into their purchase price rather. And then it's paid by them or reimbursed to you if you pay it first. So a couple of different ways, a couple of purposes, right? That's for construction, new home major renovations, up to 95% on a primary residence and 80% on rentals. Majority of it is done in five-year terms. The biggest difference between completion and draw is that draw, we will lock the rate into the mortgage before the final stages are completed. And the two programs that we use ATB and Servus, they will actually lock in your rate at that first draw can be good and bad news. But if the house, the rates go down, which we're hoping we'll see that here shortly, it's good to have it fixed, you know what's going to cost and you'll know what the interest cost will be all the way through your construction.

Len 3:16
So the other one we talked about a little bit was Purchase Plus Improvement. Purchase Plus Improvement was designed for you to buy a house and then do work to it after you've taken possession. The limit was $40,000 for quite some time. And that was, usually, only you would only get that if you had the money to do the work and or someone to do it for you. And it was only paid at the end when the work was complete. We now have lenders who will go to $100,000 and allow you to do draws. So if you're doing a large renovation, it can be set up and whatever you need the bathrooms done, you get $15,000, if carpets all done you get another $15,000, all the way up to $100,000 is what they're working with these days. So quite a bit of difference in what happens there.

Len 04:05
Probably the next thing that is happening is that you will see if you want to actually build your own house, you need private money, most likely. It's a little different setup, and it starts with having to have quite a bit of equity in a property already so that you can see at least 20% down payment, whether that's in the value of the land or in money that you've already done. They work on a little different kind of process. Obviously everything would have to be put into a budget. I just looked at the budget this morning, and the budget has 60 items in it that you would need to get a quote for, so a fair bit of legwork to do. We've done quite a few of these in the countryside where we used a private lender to build, help build the house with their money because the banks don't want you to build the house they want the builder to build the house. You have to be responsible for getting a new home warranty, which is about $10,000. So there's a few costs up front that need to be in place. Mortgage rates will range from eight and a half to 11%. Really, lenders always have, private lenders always have a fee as well of two or three percent. And of course, because there are private lenders, we have to charge a fee as well.

Len 05:22
Now, with that said, they do have a lot more flexibility, land purchasing, you know,they’re up to 70% of the value of the land, in some cases, depends where it is at the foundation stage. They would fund another 15%. At the lockup stage, which is when the house is framed and the windows and doors are in basically, they would do another 45% When you get the drywall, they would do another 65, pre-completion draw would take you to 80% of the purchase. And then the home needs to be 97% complete before they would do the final draw on it. And at 97% in most parts of Alberta, I believe you can get a possession occupancy permit, which is also required. So two things that happen there, new home warranty is on your own, and any builder that was building a house for you on a draw or completion mortgage, they would have already had a new home warranty in place, right.

Len 06:15
So here's kind of the completion package that you need for a private lender build. Complete application package, obviously credit income CRA notice of assessments for all the borrowers, for corporations or self-employed borrowers the most recent account prepared year-end financial statements, evidence of enrollment in newer morti. As I mentioned before, some lenders will accept a certificate of exemption, and you still have to pay for that as well, I don't think it's quite as much. The reason for that is if they have to take over the home, New Home Warranty needs to be in place for anything built after 2014. So if they can't get a warranty certificate after the house is standing because none of the inspections would have been done right. Now confirmation of sufficient funds and equity to complete the construction, fully exit copy, an executed copy of the land or lot purchase agreement, any existing mortgage details that may need to be paid out. Because you can get land finance, do that through ATB and again, depending on where it is it can be 50 to 75%.

Len 07:19
So, it's you're gonna need you're building plans upfront, specifications, and issued building permits will also be needed. So detailed line item budget, which we provide for you we've had, some of our private lenders have their own, we have one that a builder friend of ours did many years ago when I was in that industry. And it's very detailed as far enough. I haven't had any of the private lenders ask for their own after they've seen mine. Who's going to be in charge of your project? Are you the general contractor, are you going to be the one who's going to be following up with the trades, which is, you know, maybe like herding cats, but because they're doing all kinds of projects all at the same time. So you have to be prepared that you're going to have to spend some time on it, you know, and make sure that things are getting done, righ? Copies of a municipal inspection completion to date that will happen at the end. Depending on the project scope, a Value Survey or engineering report may be required. So, there's a lot of items that need to be taken care of when you're building your own house. I know everybody says they want to do it, but I have never… I have never had anyone say that they wanted to do a second one. Let's put it that way. The other part that you may be considering is a modular home, you can do these projects yourself. But it requires having the money upfront to do all of the other legwork. So then that legwork, especially you're in country lot you may be looking at actually putting in a road and culvert gas might be to the property line. But gas needs to get all the way to the house. Those are expensive. Electricity needs to be run in from the road probably, septic systems and drilling wells and doing all that other fun stuff on a real construction project is very time-consuming and really needs you to be on top of it and getting everything ready because when the house shows up, the house shows up.

Len 09:16
Two things that we've found with some of the pre-construction houses or pre-built houses, I guess, is that they want to be paid before the house goes on the foundation. That's where the sticky part becomes, you know, the lenders that want to give you money, and the guy with the house once wants to get paid. So Sagen, which is one of the insurance companies we’ll be talking with them in a couple of weeks. It has made it so that you know if credit is good, everything else is in place, that they will pay for the house. We allow the money to be left out for the house before the actual before it goes on the foundation or on the steel pilings or whatever, whatever it's going to go on. So a lot of things to consider in the country. If you haven't ever built a house out there. It is definitely a lot more things that need to be considered. So working with a builder, usually pretty simple, pretty straightforward. We just need the offer to purchase, obviously, your own credit and your application. But the offer to purchase specifications and the floor plan is basically all that's needed for the completion or a draw mortgage. And of course, the two different types of where interest is paid, whether it's paid at the end. It's always built into the house somewhere because the builder is either using their own money, which costs them money, and or they're using the draw money, which you get to pay the interest for. But again, they may have built that into their budget and just reimburse it to you as you get it paid.

Len 10:42
So, anyway, happy house hunting, it's springtime here in Alberta. So we're looking forward to seeing a lot more construction stuff come along. Of course, the new government program kicks in, in August, where you can get 30-year amortization on a new house. The catch for that is that they've upped the ante on the CMHC. If you go to 30 year amortization, they've now raised the CMHC percent at 5% down to 4.75%. So one hand, they can with giveth and CMHC taketh away on the other side. So, anyways, have a great day. Thanks for checking in.

Len 11:18
Thanks for listening today. I hope you found the information that we provided to be useful in your mortgage journey. And remember, you can always find our associates at www.brokersforlife.ca/associates. Have a great day.