These Are Some of The More Commonly Asked Questions We Get About Ontario Construction Loans
Question 1: How do construction draws work?
Most construction projects work on the basis of having four separate draws to cover the related costs at certain predetermined project milestones. However, the number of draws and milestones can also vary with each project
For instance, a new residential home may see the first draw occur after the completion of the basement and foundation. The second draw after the sub floor is installed, the windows installed, and the building fully enclosed. The next draw after the completion of the drywall, and so on.
Its important to plan out the draw schedule with your builder and then reconcile it to what the lender is willing to provide so that outstanding costs can be paid in a timely fashion.
Each time a draw is requested by the borrower, the lender will perform an inspection either themselves or through the services of a third party to make sure the work completed meets the requirements of the draw. If the appraiser deems that the remaining work exceeds what was projected for that stage of the project, the lender may withhold funds from the draw request to assure enough funds remain to complete the project.
Question 2: What percent of the construction costs get financed?
Construction financing for building costs tends to range between 60% and 100% of the project cost with the average being 75%.
Each project will require its own unique lender assessment and each lender may have different criteria they apply to a project to determine the percentage of costs they will finance.
There are many determining factors that can do into the percentage of costs that can be financed including 1) the amount of equity in the property; 2) the type of construction project; 3) the size of the project; 4) the strength of the resale market for similar real estate; 5) the builder under contract, and so on.
Question 3: Do I have To utilize a warranty approved builder?
Most institutional lenders will require that you are utilizing a warranty approved builder. The opposite is true with private lenders in that most do not have this requirement. At the very least, most private lenders will want to see an executed builder contract.
Question 4: What type of application information is required by a builder seeking institutional construction financing?
Institutional lenders will require the builder applicant to be a Tarion approved builder to be considered for financing. In addition, conventional lenders will want to see three years of accountant prepared financial statements showing construction related revenues and a resume of completed projects at a minimum.
Question 5: Can I secure a construction loan without having a long term take out mortgage arranged as well?
For most institutional lenders, the take out mortgage will need to be arranged before the construction financing is available for use. With private lenders, there is more flexibility with locating and securing the take out mortgage after construction has begun.
Question 6: Do you have a Comprehensive List of Construction Loan Requirements That I Can Refer to When Planning Out My Project?
The following is a fairly comprehensive listing of potential requirements and support information that you be asked to provide by a construction mortgage lender. Just keep in mind, that not all these items will apply to all project, and for some projects, additional information will be required as well.
- Building Plans. This would include blueprints, flooring plans, property elevation reports, artist renderings, and anything that support the physical description of the project.
- Construction Budget. This is the largest area of focus for obvious reasons and should include everything from land acquisition to all the hard and soft costs associated with the project including but not limited to: material costs, labour, contractor fees, water and sewer hookup, lot levies, building permits, and so on.
- Construction Contract With Builder (if applicable)
- Cash Flow Projection laid out in a time line, by cost or building activity.
- Offers To Purchase or Lease Completed Units including proof of deposits.
- Proforma financial statements for the overall project
- Environmental Assessment Report
- Property Appraisals