Of Prime Interest: Construction mortgage financing

There is a myriad of paperwork involved to ensure you have all the proper documents for your home construction approval.

  • Jun. 7, 2016 2:00 p.m.

The home construction mortgage can be very challenging to work through. Today we will try and help you understand the process for a smooth transition from the application to the completion of your home.

There is a myriad of paperwork involved to ensure you have all the proper documents for the approval.

Just as you would seek a mortgage professional to assist with the approval of a construction mortgage, it is wise to contact a professional home builder to help you with the construction of your home.

We wish to point out the following information is a quick snapshot of the construction process.

One of the most important requirements in the qualifying process is the requirement to have a contingency fund of 10 per cent over and above the down payment to handle any “cost overruns” to complete the construction.

So what’s involved when a contractor is building your home?

The first thing to do is find a lot that suits your home needs.

You can either purchase the lot outright or put a specified amount down, determined by the lender, to secure it.

When a professional contractor is building your home, you will supply the plans, an agreed upon signed contract which will lay out the cost and materials as well as the terms and conditions of the build, including when the builder will require specific “draws.”

An appraisal is required to ascertain the value of the completed project and prior to each draw the appraiser returns and does an inspection to confirm what has been completed and what is yet to be completed.

Your draws are based on these inspections.

The contractor will take all the worry out of the process by arranging all the trades and materials for the construction.

The first draw is normally when the foundation is complete.

Generally, the next advance will be at lock- up, which means the home is framed, with all the windows and doors in and the roof is finished.

The third draw will be after the drywall, electrical, roughed-in plumbing, etc. is completed.

The final draw will be when the home is complete and an occupancy permit is issued by the city or regional district.

The draws may vary slightly but will be spelled out in the contract.

The draws are based on a “cost to complete” basis and funds will be advanced to ensure there are sufficient funds held back to bring the home to completion.

One of the most important items that lenders require is the new home warranty, which your contractor will supply.

The terms and conditions of the warranty will be relayed to you by the contractor and supplied to the lender.

During the construction, you are required to make interest only payments each month. The maximum term for the construction process is typically six months.

This is just a snapshot of the process.  Contact a professional to discuss your specific situation.

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