Mortgage Blog

Construction Financing - Is it Right for You, Right Now?

June 29, 2015 | Posted by: Kelleway Mortgage Architects

Building your dream home from scratch is an exciting project!   Acquiring knowledge and skills along the way and attaining a heightened pride of ownership at the end are enticing prospects too!



The main advantage in building from the ground up is that you have greater opportunity to customize the home to your own tastes and specifications than you would have if you bought a newly built home or purchased an older one to renovate.

Before making the decision to construct your own home, here are a few considerations to ponder:

1)  Many calculate the price of the lot and the cost of construction per square foot and then anticipate that their sweat equity and dollars spent on construction will result in big savings at completion compared to buying a ready-built new home.  Those savings may not materialize after all the costs of construction and financing are factored into the equation.  Cost-effective use of time, and timing in the local real estate market,  is key in determining whether your new construction will result in significant appreciation and profit when you decide to sell.

2)  Construction financing is different from regular mortgage financing used for purchasing an existing home.  To purchase a home, you receive the full amount of the mortgage on the closing date.  To construct a home, the funds are released from the lawyer’s office at significant intervals.  (Often after you have paid for materials and labour.) 

The process begins with buying the lot and is followed by a series of construction phases that need to be inspected and verified for the benefit of the lender before the lawyer’s office will release a series of “construction draws.”  Once the project passes final inspection, the rest of the funds are released if the lender is satisfied that the work done is acceptable to what was expected.   Proof that those building  your home have been paid in full is often needed prior to final funds being released.

Following the completion of construction and the issuance of an occupancy permit, you will often need to arrange “take-out” financing that replaces the construction loan with a more regular residential mortgage.   In doing so, there may be multiple appraisals required prior to approval of your construction financing and prior to your “take-out” financing to determine the market value of the completed project.

3)  Who is going to build your home?  If you plan on doing the general contracting and some of the building yourself, consider how much time will be required for you to do so and if that time spent causes you to forego other paid work.  Also, do you have the necessary skills, experience and abilities to do the job well enough to meet acceptable building standards?

Even if you hire a general contractor, you will still need a certain amount of knowledge in order to check-in on how the construction is progressing.  Have you taken the time to carefully select a general contractor who will work within your budget and with whom you feel comfortable working?   Have you consulted a lawyer with regard to your legal obligations to that contractor?  Have you checked references for the people you hire?  Are they adequately insured to do the work?  Keep in mind that above the cost of land and material construction, building contractors will normally expect to realize a 10% to 20% profit margin on your project.

Depending upon the property, you may be involved with a developer offering land lots for sale.  Those lots may be sold with a condition that you are required to select a contractor from the developer’s preferred list.  And, the development itself may stipulate that the contractor build your home to certain neighbourhood specifications.  Even if there are realtors on site at the time you purchase from the developer, we highly recommend that you retain the services of your own “buyer’s” realtor to help you through the extended purchase process.  Arranging your financing through a mortgage broker will also give you more choice and perhaps other options not offered by the financial institution working with the developer.

4)  The construction process will take time and energy to complete, possibly more than you anticipated.  For example, after hiring a general contractor, you will be involved in the decision-making with regard to design, obtaining permits, construction, budgeting,  bookkeeping and financing.  How comfortable are you in contracting the services of others?  Are you prepared to negotiate and resolve conflicts as they arise?  Are you prepared to fire someone if needed?  Have you reviewed your legal obligations for undertaking this project and have you reviewed written agreements with a lawyer to ensure they are enforceable?

5)  Where will you be living when your new home is being constructed?  Are you financially prepared to carry the costs of your current living situation while your new home is being built?  Do you have Plan B options for financial sources and living accommodations in case the construction takes longer than expected to complete?  How nearby will you be living to the work site in case you need to do planning or review visits with your contractor?

Although there is a lot to consider before you make the decision to build your own home, we hope you will be absolutely ecstatic when you move in!  Please keep in mind that we are here to help with expert advice along the way so that your numbers add up right in the end.

What's the Next Step for You?
1)    Keep us in mind and on hand in case anyone you know runs into the same sort of situaltion.
2)    Share this post with your friends and family because you never know when the info could come in handy.
3)    Call or Email Us just to connect and get started talking about your plans. (see below)
4)    Sign Up for Glen's Perspective newsletter > Click here

Glen Kelleway, BSc, AMP, Senior Mortgage Planner & Owner

If you would like us to contact you by phone or email, please click Contact Us Kelleway Mortgage Architects will get back to you within one business day.

Phone: 604-476-0053
Toll Free within North America: 1-866-476-0053

Email: glen@mtgitright.com
(The first time you use this email address, please call first to validate yours. Otherwise, our SPAM filters will block your email and we will not see it.)

Join us on Facebook: > Click here

Back to Main Blog Page