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How does construction financing work?

Construction Mortgages

Construction financing can look a bit different at each bank, but the process is nearly the same. To understand if you qualify for construction financing it is important to have documents in place like build budget, build plans and blueprints, lot price and financial documents. Initially, construction mortgages require you to put more of your own funds into the project than purchasing would. It can range from bank to bank but typically about 20% of the construction cost. Once your cash has been injected into the build, you can start taking draws from the lender to pay the contractors and sub-contractors for doing the work. Typically, the lender will lend up to 80% LTV (less buyers own money injected) for the purchase of the lot and first draw. The second draw is around 20% complete (framing), third draw at lockup between 50-80% complete, then finally at 100% complete. Before each draw is done, an appraiser will do a site visit and give the bank an updated progress inspection report. Each bank will have guidelines on loan to value and draw fees at the time of advancement. Once the house is completed and you have been issued your occupancy permit, you can payout your construction mortgage with take-out financing (traditional mortgage). Each bank will have their own set of requitements, rules and contingency reserve (your own money in case of overages) percentages. While the build is happening, it is common to make interest only payments at an agreed interest rate between you and the lender. Construction rates are usually higher than posted rates. Working with a broker can help you determine which construction financing will best suit your needs!