Builder mortgage discussion
Feel free to respond with questions if you are about to embark on the adventure of building your own home (or having one built for you).
There are dramatically different ways of financing your brand new build.
1) You can save and build it yourself. Don't laugh, I know a few folks who built their new home over time. They bought material when they could afford it and completed their own construction. They have to meet building code and pass inspection, so this is obviously not going to be everybody's method of getting their dream home built. If you find yourself running short of cash, you will most likely need to use a private mortgage firm (arranged by a mortgage broker). Banks have a strict policy regarding the finance of partially built homes and while they will do the financing when the home is complete, you need to get a temporary private construction mortgage to help you get the home finished. New rules effective February 1st 2014 required new home warranty before a building permit will be issued, unless you waive that clause by agreeing to live in the home for 10 years. If you do waive the New Home Warranty, you will not be able to sell or finance your home equity for 10 years (Alberta). One of the very real problems with dragging out the construction is you subject your build to long term exposure to the elements. Taking long to build than the permit allows means you need to continually re-apply for your permits. Unless you have the money to build and complete the project quickly, I do not recommend this method.
2) You can find a builder who will build you a home from their blueprint selection. In some cases the builder is well established and will build the home for you, with as little as 5%-10% deposit (up front). Before you put down your deposit, you need to get pre-approved for your mortgage. The construction might take up to a year, so the rate is not necessarily going to be the one available today. You don't want to place your deposit and then try and find a mortgage, because if you can't get the financing you need, you forfeit your deposit and the builder sells your home to somebody else. Most banks will pre-approve you for your mortgage, but you will need to lock in your rate 120 days prior to completion. There are very few bank branches who will hold today's rate for 12 months. However, if the construction goes into overtime, you will get the rate that exists at the time of completion.
3) You can choose to have your home custom built. You now need to contact your mortgage broker to discuss the need for both construction financing and completion financing. If you plan on using high ratio financing through CMHC (minimum down payment) you will need to involve the bank's underwriters before construction begins. They have many rules that they need to follow to stay qualified under CMHC guidelines. Schedules for building and timetables for draws are strictly adhered to.
The bank may automatically include completion financing at the end of the construction period. This does simplify the process for all concerned. I would not have to charge a fee for this service, because the bank pays me to arrange it (Because it is not considered a self-build if you have the same professional builder as your general contractor).
4) You can do a self-build through an institutional lender. In this case, you need to get your financing arrangements done before you put the shovel to the ground. That means construction financing and completion financing. The difference here is the CMHC rules are going to place you under the same timetable as a regular builder. So line up your trades and make sure you have an experienced construction supervisor looking after the build schedule. You will also need to get your own Home warranty insurance.
Alberta New Home Warranty
All new home construction, since February 1st, 2014, needs new home warranty insurance. When it voluntary to purchase it, the process was easier. All registered new home builders can get this warranty cheaper, because they purchase it at volume rates. The process for them has not changed much. www.municipalaffairs.alberta.ca/home_warranties_faqs.cfm
will answer some of your questions. I recommend an Alberta based New Home Warranty insurer (contact me if you want to know why)
The process for Self Builds has become sticky. A potential customer recently called me asking for help with new home warranty. There is added expense because not only is there a premium, the New Home Warranty insurers are asking for proof of deep pockets. They want to ensure that even if you have been approved for financing you can afford to cover over-runs and unforseen incedents. Don't even think about trying a self build until you investigate the new home warranty rules. Much like a municipality asks a land developer for a Line of Credit supported by a lender, the wanrranty insurers are doing the same with one time home builders.
If you can qualify through a bank, I have a special arrangement through a bank where I arrange and monitor the entire build. I do charge a fee to broker a self build mortgage, because self-built home projects are something a bank does not pay a broker fee to the broker.
5) You can finance the construction loan through a private mortgage lender. The advantage is a lack of red tape and some flexibility on the construction schedule. Private lenders can let you draw down as you need funds. Some only charge for the outstanding funds (some charge for all funds from day one). If you use a private lender, you can avoid a CMHC premium. If the cost of building is $300,000 (including lot) and the final value of the home is $400,000, you're sweat equity is 25%. You can now qualify for a conventional completion mortgage and avoid any CMHC premiums. The downside is that the private mortgage rates are higher and they will charge you a lender's fee. I will also need to charge a broker fee, because private lenders normally do not pay a finder's fee to the broker. If the build is efficient and you get everything built on schedule, you will still save money. All fee are disclosed and explained to you, up front, so there are no surprises. They are generally paid out from the mortgage proceeds.
Due Diligence items to do before signing the construction contract...
-Check with the Better business bureau to see how they rate your builder, or contractor.
-Quickly interview the neighbours to see what their opinion of the area is. They might point out a parking nightmare problem or loud noise issues.
-Check the internet for any news stories about your new neighbourhood or builder
-If you have time, have your lawyer review your construction contract before signing. All contracts are slightly different and you want to know the pitfalls.
- Make certain your financing is approved (or pre-approved for a completion mortgage).
- Private construction draw payment schedules are usually negotiable. Let your broker know what kind of payment schedule works for you. Most of the time interest is brought current when the next draw is taken.
- Make sure your accounting allows for a 10% construction holdback. Once the project is inspected and complete, these funds can be released by the lender's lawyer.
- If you run into overtime on the build, most lenders will give you a time limit and then complete the construction themselves. This cost either comes out of the holdback or is tacked on to the total mortgage.