For many clients, the idea of buying their own land and building a home is the ultimate dream – a dream that can be achieved with construction financing

Team RRP are experts in construction financing and can assist those who want to build their own home or someone else’s as a small builder.

Up front we advise that construction financing isn’t for the faint of heart!  Lenders perceive additional risk with builder mortgages due to:

                • Longer time horizon which increases a lender’s perceived market risk
                • The risk of the home being less marketable during the build
                • Development risks such as cost overruns, liability, etc.

When lenders perceive risk, they demand stronger borrowers and reduce the available financing.  This means anyone contemplating a builder mortgage needs to have more down payment than they would when buying an existing dwelling.

The equity required to qualify for builder financing can present a significant obstacle for some clients.

project funded by construction financing

Once equity is assured there are a couple ways to finance a builder mortgage:

        • A one step approval where you acquire the land with the end home in mind with budget & plans available.
        • A two step approval: 1) We assist you in acquiring the lot or existing home to be demolished. 2) We approve you for builder financing once your budget and plans are in place.

Note: In either case, the lender will provide builder financing at certain stages of progress called “Draws.”  Lenders do not provide money up front due the risk of the borrower spending it elsewhere (Vegas anyone?).  This is why borrowers need a minimum 25% of the cost of the build and are reimbursed by the lender as the build progresses.   Most lenders allow 4 draws after the initial land advance.  Traditional builder milestones are Lock-Up – 40% Complete, Drywall – 65% Complete, Interior Finishing – 85% complete, and Final Draw – 100% complete.

For builder financing our general rule of thumb is:

        • 35% down payment for the purchase of land (not including closing costs such as property transfer tax)
        • A minimum of 25% of the construction budget as working capital (excludes what are called soft costs such as permits, plans, etc.)

“Thank you for your patience, and your care and attention. We can’t thank you enough for all your hard work over the last few months. Without you, we’d never have our beautiful new home! Thank you for going above and beyond. It was really a joy working with you. Take care and we’ll be in touch on our next mortgage!”

K & S

Typical steps towards obtaining a builder mortgage are:

  • Acquire the home with maximum 65% of value mortgage OAC Finalize budget, plans, and permits
  • Order an appraisal to confirm end value of the new home supports greater or equal value of land & building costs
  • Confirm builder mortgage financing in place (The first 4 steps can be consolidated into 1 if buying with budget and plans in place)
  • Use your working capital to start the build and progress to Lock-Up
  • At Lock-Up an independent appraiser confirms your work in place based on your budget. The lender then releases funds for you to progress to the next milestone which is 65% Complete – Drywall
  • Appraiser and Lender repeat progress inspections and release additional funds at remaining milestones of Interior Finishing – 85% complete, and Final Draw – 100% complete.
  • If the lender doesn’t offer term financing at conclusion of the build, we can secure term financing OAC, 120 days from completion of the build.

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