Understanding the Construction Financing Process 1
Building your own home is an exciting and rewarding project. We’re 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 as you’ll see, construction financing is a more detailed process, with several important milestones that don’t take place when you buy an already existing home.
We’ve created this guide to help you plan your project and understand how construction financing works.
What to expect. When you build your own home, there are many more steps and expenses than if you buy an existing home. In the simplest terms, a typical mortgage is advanced in one lump sum. Construction financing is different. At TD Canada Trust, the total amount borrowed to complete a project is usually advanced in three stages within one year.
Typical Mortgage
You receive all of the money you borrowed at the time you obtain the title to the property.
Construction Financing
At TD Canada Trust, you pay the up-front costs, then receive up to three advances.
First advance at the Rough-in stage
Second advance at the Drywall stage
Third advance at the Completed stage
Determining what you need to get started
During the application process, you will need to understand the initial costs that you will be responsible for.
Land
To secure construction financing you are required to own the land, as TD Canada Trust will need to register a first 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, sewer connection,
hydro and gas service.
Soft costs
These 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 • Fees for architects and engineers
• Municipal permits • Fees for realtors and solicitors
• Fees for appraisals and inspections
Initial building costs
You are expected to finance the initial stage of construction (approximately 35% of construction) 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.
1/Your home is at the Rough-in stage when the foundation, sub-floor, framing, sheathing, roof, roughed-in electrical and plumbing are completed. This is typically 35% complete.
2/Your home is at the Drywall stage when the exterior completion, pouring of the basement floor, and installation of the heating source are completed. This is typically 65% complete.
3/Your home is at the Completed stage when the finished interior doors, floors, carpentry, painting, heating,plumbing, electrical, walks and driveways (subject to season) are completed. This is when the house qualifies for an occupancy permit.
Understanding the Construction Financing Process 2
Lien holdbacks
Your solicitor is required to hold back some of the money advanced at each of 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 repayment 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.
TD Canada Trust will instruct your solicitor to hold back a percentage based on the chart below. Ask your solicitor for details.
The application
Here’s what you should plan to bring to your first meeting
with your TD Canada Trust mortgage representative – David Avrahami (416-833.6693)
All information associated with the construction
• Construction contract, including costs
• Construction plans or blueprints
• Quotes for labour and material 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 purchase agreement with evidence of available funds
Other requirements to help fulfill the application for construction financing
• Confirmation of required funds to complete 35% of construction (the Rough-in stage)
• Confirmation of income/employment
• Name, address and telephone number of your solicitor As we familiarize ourselves with the details of your project, we can tell you what, if any, other documents specific to your application may be required.
The appraisal
Determining the estimated value of your completed home
TD Canada Trust will obtain an appraisal to estimate the value of your completed home, including the land.
4/To arrive at an estimate, your appraiser will review your construction plans and blueprints to understand the type of home you are building.
For the purpose of the mortgage application, the value of the completed project is the lesser of a) the cost to
construct including land value or b) the appraised value.
Province Percentage of Holdback
Alberta 10
British Columbia 10
Manitoba 7.5
New Brunswick 20
Newfoundland 10
Nova Scotia 10
Ontario 10
Prince Edward Island 20
Quebec 15
Saskatchewan 10
Understanding the Construction Financing Process 3
Your first advance – the Rough-in stage
When you have completed the Rough-in stage, we 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 expenses from your own resources.
TD Canada Trust will release your first advance of funds to your solicitor, who will keep a percentage of it as a lien holdback. The percentage varies by province. 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 of this advance can be calculated by your TD Canada Trust Representative.
Prior to releasing the first advance, your solicitor will need –
• Builder’s all-risk insurance assigned to TD Canada Trust
• A survey showing the location of all buildings to be constructed
• Confirmation that all necessary building permits are in place
Your second advance – the Drywall stage
When you have completed the Drywall stage, we will send an appraiser to your home to inspect the property.
TD Canada Trust will release your second advance to your solicitor. Once again, a lien holdback will be applied.
The amount of your second advance is dependent on the requested mortgage amount, the amount of the first advance and the remaining cost to construct your home.
Your third advance – the Completed stage
When you have completed your home, we will send an appraiser to your home to inspect the property.
When the appraiser has determined that your building is complete, TD Canada Trust will release the final advance of funds to your solicitor. A lien holdback will again be applied.
Prior to releasing the final advance, your solicitor may request further documentation, which may include –
• Well Water Potability Certificate (if applicable)
• Flow Certificates and Septic Certificates (if applicable)
• Occupancy Permit
• New Home Warranty Certificates (if applicable)
Release of lien holdbacks
All lien holdbacks will be released to you approximately 30-60 days (depending on your province) after your project has been completed, assuming there have been no lien
claims made against your property.
Anticipating mortgage interest and principal payments
By the time you reach the Completed stage, most of your mortgage amount will have been advanced to you through your solicitor. You will be required to start making regular
mortgage interest and principal payments shortly after receiving your third advance.
Financing the construction of your custom home or renovations of your exiting or newly purchased one can be complicated….but made easy with my help.
Please call me to discuss it all at your convenience: Contributed By DAVID AVRAHAMI at TD Canada Trust– 416-833.6693