Mortgages by Niels

Private Construction Loan Bolton

If you’re adding to your existing property, building a multi complex or high rise, project financing is a move that is crucial to your success. Application for a private construction loan is a different process to understand if your project falls under a Completion or Draw Mortgage Loan. From there our private construction loan Bolton team can access what suits your needs best.

    How do private construction loans work?

    Depending on if you own the land that you plan to build on, the first part of the construction draw would be to purchase the land. Some lenders will go to sixty five to 70% of the cost of the land. Not all lenders will pay the first draw in advance and will expect you to cover the purchase of the land.

    When the construction is complete you have an option to refinance into a conventional mortgage or pay out the construction loan in full.

    The draws will all be released except for 10%. Once the work is complete the contractor will have 45 days to file any lien claims against the property. You can be asked to sign a certificate of substantial completion after 97% is complete. You do not have to sign this if you’re not satisfied with the contractors work.

    What is a completion mortgage?

    A completion mortgage is not much different than a traditional mortgage. With a completion mortgage you take on the full mortgage amount when you complete the build and take possession of your home. What you will be responsible for is to fund the build period, all materials, and trades working on your home. Some of the pros of the completion mortgage is that you will not have to make payments during the build period. From there the lender that will fund your mortgage will make a lump payment once your completion mortgage is funded. One of the cons to a completion mortgage is that if you run into financial shortages between the time you sign the purchase agreement and the time you take possession you risk loosing funding.

    What is a draw mortgage?

    A draw mortgage is when a builder has the ability to be able to ‘draw’ on a mortgage at different stages of the build of your home. There are different draw schedules with different lenders that are structured. The builder will typically receive the last 10% of the payment when you close on your home. You the home owner start making payments on the draws that are made along the process of the build of your home. This type of mortgage is more common and a more ‘secure’ option for both the builder and buyer. Builders know that money has been funded and can count on the project moving forward. On the buyers end the risk of financial shortage is also removed. To consider when you’re choosing this option that you will be making payments to the mortgage without having a home to live in. So this could mean for some in addition to a current mortgage or rent payment, to be prepared for this.

    How much do you have to put down on a construction loan?

    For construction loans for most lenders there is a minimum of 20% down payment required and some lenders will want up to as high of 50% down payment. The lender will look at both the buyer and builders end to ensure the project is a good fit for all parties. Will the buyer based on their ability to pay of their loan, with their current debt to income ratio, credit score, employment history, and as well other possible liens on your property. For the lender their reputation will be taking in consideration, and detailed plans and estimates on costs to complete your project.

    What are the qualifications for a construction loan?

    Some of the main qualifications that it will take to qualify for a construction loan are: 

    • Ample income to be able to pay of the construction loan. 
    • Good to excellent credit which falls in the range of 750-850.
    • Down payment of minimum of 20%.
    • Low dent to income ratio.
    • Builder or general contractor approval by the lender.

    Project and construction budget approval by the lender. Some of the question you can ask when choosing your loan lender are:

    • What type of construction loans do you offer.
    • Can I use the equity I have in my land toward the down payment.
    • How do you pay your construction draws; based on percentage of completion or a set schedule.
    • Can the builder request a first draw to pay for materials.
    • What happens if there is a delay in building the home or a sudden increase in material cost.
    • Do you charge closing costs or fees.
    • What interest rates are available and are they fixed or variable.
    First Draw (percentage represents typical draws)
    Foundation 15%
    Second Draw (percentage represents typical draws)
    Walls, Roof, Windows, Doors 40%
    Third Draw (percentage represents typical draws)
    Drywall, Floors 70%
    Fourth Draw (percentage represents typical draws)
    Upon completion 100%
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