We’ve talked about construction loans, or progress draw mortgages, at great length on this blog. When you want to build a home, your construction loan will be divided into several different parts, called draws, to be released at different times during the construction period. But how exactly does the application process work?
It’s no secret that building a home is very, very expensive; even more so than just simply finding the home of your dreams and taking out a Toronto mortgage on it. Because of this, the lender will be much more involved in the actual building of your home than you may have thought. But first, you’ll need to obtain a loan very similarly to how you would when taking out a conventional mortgage. The lender will want to know that you have good credit, stable employment, and the ability to pay back the loan. Then, after they’ve verified that you’re a qualified borrower, they’ll really start to get involved.
Because each home is different with needs ranging from one end of the spectrum to another, lenders want to be highly involved in the pre-construction phase. This is most relevant when it comes to finding your builder. Lenders will want to make sure that the builder you’re using is of good quality and that they’ll get the work done in a timely fashion. They may already have a list of local builders that they work with, or you may simply have to get your builder approved by the bank first. That builder will then have to draw up plans for the home, as well as the estimated costs to go along with those plans. The costs will be placed together in a package which the lender will then need to approve. The lender will also need to see the plans for the home, in order to make sure that the value of the home corresponds with the money being borrowed.
Once the plans and budget have been approved, the builder and the lender still need to work closely together. The builder will estimate how many draws will need to be set up, and the lender will create a schedule according to the number of draws. The lender will also create an escrow account that the builder may draw from at each progression stage, but never before.
The process of building the home and taking out progress draws will begin, and this continue until the home is complete. However, before the final draw can be taken by the builder, the lender often sends an appraiser to the property to inspect it, make sure it’s of the value always thought, and that there are no problems. Once the appraiser deems that everything is right, the lender will release the final draw to the builder.
Construction loans are one of those loans that are very simple in concept but can quickly become complicated when you actually need one for yourself. However, making sure that everything is approved by your lender will be of a great service to you as other professionals inspect your home and make sure that the builder has done the job you requested, and that you have a beautiful home to live in once construction is complete.
