Once the construction mortgage has been approved and registered against the project, there are a few more things required by most lender prior to advancing funds to cover construction draw requests made by the borrower.
The number of draws overall will vary with the type of project, but typically a residential home build will be structured to have 4 separate draws at the following stages of construction completion:
The lien act requires that hold backs be deducted from each draw. The typical legislative amount is 10%, but lenders can require higher amounts for their own programs above what may be required by law. The hold back amounts will be held in trust with the borrower’s lawyer.
All costs related to the overall draw management process including legal fees and appraisal fees are at the expense and responsibility of the borrower.
For non institutionally based construction mortgages, the hold back allowance will typically be paid out 45 days after completion if there have been no liens registered against the project. For institutionally based construction mortgages, most lenders will only advance the hold back portion in the form of a long term take out mortgage.
The first advance against the construction mortgage cannot occur until the following items are in place.
First, the borrower will need to provide a completed survey of the property clearly indicating where the new building will be sitting within the boundaries of the property. An alternative to an actual survey would be a title insurance policy for the property in question.
If the property is not connected to a municipal water source, the property owner will need to provide certificates for both water potability and septic prior to the first draw being advanced. If at the time of the first draw this condition is not met, the lender may elect to retain a further $5,000 to $10,000 from the draw advance until the condition is covered off.
To assess the borrower’s required equity in the project in the form of investment against costs incurred to date, the construction lender will either perform their own inspection of the work completed or hire an outside appraiser to complete an assessment of the work completed and remaining prior to the first draw being approved and advanced.
When all of these requirements have been met, the first draw will be approved and advanced to allow the property owner or borrower to pay off the outstanding costs incurred to that point in the project.
For more information on draw requirements, I suggest that you give me a call and I will make sure you get all your questions answered.