Conditions & Requirements of Institutional Construction Loans
Construction loans approved and issued by institutional lenders will have both the construction loan and the take out or completion mortgage approved at the same time so that one will be paid out by the other at the completion of the project.
While there can be variations among lender programs, here’s what a fairly standard construction financing program looks like as well as its major requirements and conditions.
- The borrower needs to have clear title to the land or building lot prior to or at the time of the first progress draw. No project draws will be advanced until title has been secured.
- A maximum of 4 advances are permitted during the construction process. The first advance will take place after the foundation has been completed. This is estimated to represent 15% of the total project. The second advance will take place when the structure is fully enclosed and can be secured from entry (approx. 40% complete overall). The third advance takes place when the drywall is completed (approx. 70% complete overall). The fourth and final stage takes place at the completion of the overall project (100% complete).
- For each draw, your lawyer will be required by the Lien act to withhold 10% of the construction costs. The amounts held back are paid out 45 days after the date of substantial completion if there are no liens registered. If liens are registered, the hold back funds will be retained until the outstanding liens have been resolved.
- The construction mortgage registration and all construction progress draws are administered by the borrower’s lawyer and all related draw costs (legal feeds, appraisal, inspection fees, etc.) incurred will be the responsibility of the borrower.
- The interest cost during the construction period will likely be between prime plus 2% and 4%. The interest cost incurred will be deducted from the borrower’s bank account via preauthorized payment on the first of each month. The construction mortgage payments are calculated by applying the interest rate to the amount drawn. These payments are interest only.
- When the construction project has been completed, a pre-arranged take out or completion mortgage will payout the construction loan at the time of completion. This process is triggered by the issuance of an occupancy permit at the time of the final draw.
- Completion mortgage loans are typically approved at a variable interest rate that can be converted to long term fixed interest rate at any time without additional cost once construction is complete.
- For borrowers not on a municipal water supply service, water potability and septic certificates must be provided to the mortgage lender prior to advance of the first scheduled draw. This condition can be met by the borrower obtaining title insurance whereby the related policy covers off the water and septic requirements. If these conditions are not met, the lender will retain a $5,000 hold back amount until the certificates are provided.
- While under construction, builder’s risk insurance needs to be in place and a completed survey or title insurance will also be required prior to any advance being made from the first draw.
Once again, the above is will not apply exactly to all construction mortgage lender programs, but it does provide you with a good overview of the structure of institutional construction loans and their related conditions.
If you would like to review your financing options for a construction project, please give me a call and we will go through your situation together.
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About the Author Joe Walsh
I'm a Toronto Mortgage Broker that arranges mortgage solutions on residential and commercial real estate property. With over 30 years of mortgage financing experience, I'm able to quickly assess your financing requirements and provide relevant solutions for your immediate consideration. Joe Walsh Google+ YouTube Channel