Finance Your Real Estate Project
Construction financing can help you in an assortment of ways. When you start a real estate build, you will have expenses for different aspects of the project such as hiring a designer or architect, general contractors, and building permits. It’s important to be knowledgeable of the different types loans that are available when you are seeking to finance your construction project.
get funds for your build ▸
What You Need To Get Started
Building your own home is an exciting and rewarding project. Avantus is here to help you understand the process of financing the construction of your new home so that you can get started with confidence and proceed with peace of mind.
You may have some experience in obtaining mortgage financing, but construction financing is a more detailed process with several important milestones that don’t take place when you buy an already existing home.
What To Expect
When you build your own home, there are additional steps and expenses as opposed to buying an existing home. In the simplest terms, a typical mortgage is advanced in one lump sum.
Construction financing is different. The lender typically requires you to pay any costs upfront, and then the total amount borrowed is usually advanced in three stages over the course of the loan - usually one year.
During the application process you will need to understand the initial costs that you will be responsible for:
Land
To secure the construction financing you are required to own the land, as the lender will need to register a mortgage on it.
Servicing
The land you intend to build on needs to be fully serviced. This includes site preparations and municipal services such as septic service, water connection, sewerconnection, hydro, and gas service.
Soft Costs
Soft costs are out-of-pocket expenses for services and charges you are likely to incur at the outset of and throughout the construction phases. Depending on your plans and the location of your home, these will likely include:
Property Taxes
Municipal Permits
Fees for Architect
Fees for Realtors and Solicitors
Fees for Inspection and Appraisals
Fees for Mortgage Broker and lender
Initial Building Costs
You are expected to finance the initial stage of construction (approximately 35% of the construction cost) with your own money.
Cost Overruns
We recommend that you set aside an additional 15% of the estimated construction costs to cover unexpected overruns.
Interest Costs
You are required to make interest only payments on all amounts advanced until your regular principal and interest payments begin.
In addition to the costs already outlined, you will also need to budget for lien holdbacks.
Lien Holdbacks
Your solicitor is required to hold back some of the money advanced at the Rough-In, Drywall, and Completed Stages of your construction project. This money is held in reserve in the event that a contractor or supplier claims a lien on your property. A lien is a claim by a contractor against the property to secure payment of unpaid construction costs.
The amount of your lien holdback and the number of days that your funds will be held in trust varies by province. The lender will instruct your solicitor to hold back a percentage based on the province you are building in. In British Columbia the holdback amount is 10%. (For more detailed information and/or explanation ask your lawyer or solicitor).
The Construction Financing Process
1. The Application
Here’s what you should plan to bring to your first meeting with your AVANTUS Advisor:
All information associated with the construction including:
Construction contract, including costs
Construction plans or blueprints
Quotes for labour and materials if you are acting as the general contractor
Site preparations, including municipal services for the lot (e.g. excavation, septic service, water, sewer, hydro, gas, etc.)
Evidence of ownership of the land and/or a copy of the contract of purchase and sale with evidence of available funds.
Other requirements to help fulfill the application for construction financing:
Confirmation of required funds to complete the Rough-In stage (35% of construction costs)
Confirmation of income and employment
Confirmation of New Home Warranty
Name, address, and phone number of your lawyer or notary
As the lender reviews the details of your building project, they will notify you of what other documentation, if any, will be required to proceed with your application.
2. The Appraisal
This determines the estimated value of your completed home. The lender will obtain this appraisal to estimate the value of your completed home, including the land.
To arrive at an estimate, your appraiser will review your construction plans to understand the type of home you are building and then compare it to other similar properties in your area.
3. Your First Advance
When you have completed the Rough-In stage, the lender will send an appraiser to your home to inspect the property and confirm that the Rough-In stage is complete.
Up to this point you will have paid all the expenses from your own resources. The lender will then release your first advance of funds to your solicitor, who will keep a percentage of it as a lien holdback (10% in British Columbia). At this point, monthly interest-only payments will commence.
The amount of your first advance is determined by a formula based on the total requested mortgage amount and the remaining cost to construct your home. The estimated amount can be calculated using the worksheet provided at the end of this document.
Prior to releasing the first advance, your solicitor will need the following:
Builder’s all-risk insurance assigned to the lender
A site survey showing the location of all buildings to be constructed
Confirmation that all necessary building permits are in place.
4. Your Second Advance – The Drywall Stage
When you have completed the drywall stage, the lender will send an appraiser to your home to inspect the property. If everything is approved, the lender will release the second advance to your solicitor and once again the lien holdback will be applied.
The amount of the second advance is dependent on the requested mortgage amount, the amount of the first advance, and the remaining cost to construct your home.
5. Your Third Advance – The Completed Stage
When you have completed your home, an appraiser will once again inspect your home. When the appraiser has determined your home is complete, the lender will release the final advance of the funds to your solicitor and the lien holdback will be applied.
Prior to releasing the final advance, your solicitor may request further documentation which may include:
Well Water Portability Certificate (if applicable)
Flow Certificates and Septic Certificates (if applicable)
Occupancy Permit
New Home Warranty Certificates
Release of Lien Holdbacks
All lien holdbacks will be released to you approximately 30 – 60 days after your project has been completed, assuming there have been no lien claims made against your property.
6. Anticipating mortgage interest and principal payment
By the time you reach the completed stage, most of your mortgage amount will have been advanced to your solicitor. You will be required to start making regular mortgage interest and principal payments shortly after receiving your third advance.
Getting Approved For A Construction Loan
There are a number of core factors involved in getting approval of a construction loan. Our extensive experience and expertise in brokering construction mortgages has afforded us access to all the top lenders in British Columbia, just another way we can help get your loan approved.