Construction Mortgages: Draw, Completion, and Purchase Plus Improvement

Real Life Mortgage Solutions

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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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 t...