On several occasions we have had people ask us at Dominion Lending Centres about construction mortgages. Every lender has their own guidelines and rules when it comes to construction mortgages. That’s because there are many details involved in the process of construction, let alone the mortgage that actually funds it! Below is part 1 of 2 of what a construction mortgage entails and what you need to know when tackling this complex mortgage.

Construction Mortgages almost always start with raw land

Raw land usually comes in 2 forms: service lots and un-serviced lots*

Serviced Lots are defined as having:

Portable water-water that is safe enough for drinking and food preparation
Septic/sewer services-city connected sewers or a septic field
Access-a driveway, as rough or refined as it is
Hydro-connected to power
Natural gas (if applicable)
Need 25% to 35% down
Un-serviced Lots are defined as having:

Portable water-needs to be available
Septic/sewer services-not applicable
Access-(other) or not typical such as water access
Hydro-not applicable
Natural Gas-not applicable
No Agricultural Land Reserve**
Need 35% to 50% down
*guidelines depend on the lender
**land that is reserved for agricultural activity (ie. Farms)

Rates and terms of purchasing raw land

Serviced Lots usually have:

Maximum Mortgage Amount, depending on the lender
Maximum Mortgage Amortization, depending on the lender
Rates are usually a little higher than discounted rates (ie best discounted fixed rate plus 1%), but not always
Fees – usually a lender/broker fee, but not always
Terms – usually 1 thru 5 years
Un-Serviced Lots are defined as having

Maximum Mortgage Amount, depending on the lender
Maximum Mortgage Amortization, lesser maximum amortization compared to serviced lots
Rates are usually a little higher than discounted rates and higher than serviced lots (ie best discounted fixed rate plus 2%), but not always
Fees – usually a lender/broker fee and usually higher than serviced lots, but not always
Terms – usually 1 thru 5 years
How do you qualify?

You need to complete a mortgage application
You need to provide credit bureaus and income documents showing that you qualify for the amount of money you wish to borrow.
You need to provide a detailed construction budget.
You need to provide a title search (through your mortgage broker or lawyer)
You need to submit a copy of the purchase agreement, including all addendums and amendments.
Builder information and resume (if requested) and project contract
Full set of legible construction drawings scaled to legal size paper or smaller
HPO registration (Home Owner Protection forms or registration of new home)
You base the amount to be borrowed on the appraisal based on a completed project
You may need to also provide….

Copy of all construction contracts
Corporate financial statements (if applicable)
You need to submit a detailed summary of the deal, including how you are expecting to move out of the higher interest rate construction mortgage into a “normal” mortgage, depending on the lender
Copy of purchase agreement for the land purchase
These are the first steps to setting up and understanding a construction mortgage. There are unique traits to this type of mortgage as with any other mortgage. Remember, you should always consider calling a mortgage broker to help walk you through this complex process!

Stay tuned for Part 2 which will cover the budget, the loan, and key take points.

By Geoff Lee