Yes, it is possible to get a construction loan from your bank. Nevertheless, It is important to fully understand the timing and phases of the process before you get too excited about the building.
Building a new home can mean a lot of great things for you and your family, including the opportunity to live in the house of your dreams and spend less than you would on a pre-built home. There is also the sense of accomplishment and satisfaction that comes with it all.
While you’re in the initial phase of planning your dream home, it may be helpful to talk to a licensed mortgage broker. You will have a realistic idea about the process and determine f you can be approved for a construction loan. The bank will not give you money for the lot and will require you to fund 25% of the value of the project from your own resources. This 25% should be sufficient for you to complete the first phase of the work which represents 35% of the whole project. Once the project reaches 35% (we call it the “lock up phase”) the bank will start releasing the money for the next phase. If you don’t have the 25% in cash but you have a paid-off lot, you can borrow money against the property. The most important information that banks will consider is whether or not you have the ability to pay back the loan.
After you have worked out your building plans, schedule, and the estimated cost, you will need to present to the bank a contract signed between you and your builder. Everything will be verified, to ensure it complies with the bank’s requirements. The bank will also require an appraisal of the estimated value of the project to be completed.
Even though the construction loan has been approved, neither the client nor the builder will have access to the funds right away. It is important to fully understand the timing and phases of the process before you get too excited about the building. The point is worth repeating: the bank will NOT give you money for the lot nor the first phase of the project! When you complete 35% of the work (the first phase also known as “lock up phase”), the bank will begin to release funds for the next phase. With each phase completed, the bank releases a little more money. If you do not have enough money to complete the 35% of the project, or if you run out of money before the end of each phase, the construction stops, and that is not good!
At the end of each phase, you will ask the bank to have the property appraised. A professional appraiser will report to the bank on the progress of the project, and the phase the project is at. It is always wise to have some reserve funds, so the project does not stop in case the appraiser determines that the project is not quite at the phase you thought it was.
In addition, it is important to note that at each phase completed, the bank sends the money to the lawyer who will pay the suppliers on your behalf. Of the amount received, the lawyer will have to hold in trust 10% of the amount released to ensure that all suppliers are paid at the end of the process. This amount retained by the lawyer will only be released 60 days after the conclusion of the work. Such a reserve is required to avoid any lien against the property. If there is no problem, you will receive the remaining amount after the 60 days.
Andreia (Brazil) Guariento is a Mortgage Broker Specialist working throughout Canada.
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