For most residential construction loans, the lender will agree to providing 4 separate loan advances or construction draws to cover off the cost of construction at specific points of completion.
Keep in mind that at all stages, the lender will only be prepared to cover off hard costs, and any soft costs incurred are deemed to be the responsibility of the borrower and are viewed by the lender as part of the borrower’s equity in the project.
Before the first draw is advanced, it is required that the borrower have clear title of the property, or in some cases a very small mortgage can still be in place. The construction mortgage will then be registered against the property, and the underlying equity in the property will further cover off the borrower’s equity requirement for the construction financing facility. If there isn’t sufficient equity in the property to meet the borrower’s requirement, the first draw advance will be reduced to allow for additional borrower investment in the project prior to the first draw advance.
For more information on how a loan advance process can be structured for your construction project, please give me a call and we can go through it together.