Investing in Residential Properties and Construction

Financing is a hurdle for some to get over and, unfortunately, it is right at the beginning of your project. Unless you are independently wealthy or have a large sum of money just waiting to be spent, you are going to need financing to build your new dream home or complete your renovation. And if you’re anything like me the world of financing in general is a little mysterious.

Construction financing can be obtained from large financial institutions or can be obtained from private lenders as well. As with anything, it is a good idea to explore all of your options before you commit to any lender.

What do You Need to do to Secure Construction Financing?

So how do you get construction financing and what do you need to provide your prospective lender in order to secure financing? There are likely numerous answers to that question however here are a few items that would be a good start.

You will be required to provide your financial information, as you would be with any other type of traditional financing or mortgage. No matter how beautiful the house is that you are planning to build, lenders will not lend you more money than you can support. In other words – if you can’t service your debt they will not lend you money.

AL-2ST-SS-2726 [Spec-Kelwood][Lot 1 Blk 3][ 1 Plains blvd, Pilot Butte] MAIN FLOOR

They will likely want to see a complete set of construction drawings so they can see exactly what it is that you are planning to build including all finishes. They will likely have an appraiser look at the drawings and assess the value of the completed project. Based on the appraised value they will have a maximum dollar figure that they will lend.

AL-2ST-SS-2726 [Spec-Kelwood][Lot 1 Blk 3][ 1 Plains blvd, Pilot Butte] 3D VIEW

The lender will want some kind of assurance that once the house is under construction it will actually be completed. This may be a simple as providing them with your own personal credentials if you are planning to look after the construction yourself or providing them with the name of the builder you are planning to hire. If you are hiring a builder, they may want to see a sample construction contract again assuring them that the project will be completed.

They will likely want to see a projected budget that can be reviewed to ensure that the budget is realistic and that the money you are requesting will in fact be sufficient to complete the project.

Along with a projected budget they may also want a projected construction schedule. This becomes important since they will likely be advancing percentages of the financing once certain milestones are reached. Typically you will receive 33% of the money once your house is framed with the roofing on and windows and doors installed. Another 33% will be advanced once drywall is complete and the final 33% upon completion. You will be required to notify your financial institution when you are ready for your draws. At that point an appraiser will come out to ensure that you are in fact at the point where you are eligible for a draw. Your draws will be forwarded to your lawyer, who will then “holdback” a percentage which will ensure that sub contractors are paid and no liens are placed on your house.

What Happens After Construction is Finished?

Once your project is complete you will most likely end up with a traditional mortgage as you would have if you had purchased an existing house. Construction financing is intended to be short term financing used to complete the construction of your project and then transition to a traditional mortgage.

Financing in general can be hard to understand. Throw in construction financing and it can be all the harder. No doubt talking to a mortgage advisor would be the best way to get all you questions answered and get your dream home off to a great start. Have more questions about financing and investment properties? Check out our Commercial Construction Services page to get an idea of the many services we can offer you!

Clark Hooey
Alair Homes Barrie Project Manager