Construction Mortgage Draw Process
“Here is An Outline of How A Typical Construction Draw Process Works”
Ok, so you’ve got a commitment in place for your construction mortgage, you’ve started work and are getting close to the completion point for the first draw.
Now What?
First, lets take a step back and provide a basic overview of the construction draw process.
For a residential home construction project, there are typically 4 draws issued by the construction mortgage lender. In most cases, the first draw is issued after the foundation is in place, the second draw is issued when the structure is enclosed and secured, the third draw is issued when the drywall is finished, and the fourth draw gets issued at the completion of the project.
In direct accordance with the lien act, hold backs for each draw (typically 10%) will be retained in trust by your lawyer. All draw related costs including lender required expenses are to be covered by the borrower.
Hold backs are paid out 45 days after completion provided that there are no liens registered against the property.
Before the first draw can be issued, there are a few things most lenders will require.
First, a completed survey showing the boundaries of the new home, or title insurance, is required prior to the first draw.
In cases where the property is not connected to a municipal water supply, the borrower must have water potability and septic certificates prior to the first draw. It this condition is not met when the first draw is requested, the lender may cut back the draw and retain an additional $5,000 to $10,000 until such time that the certificates are available.
The lender will also either do an inspection of the work completed or hire a third party appraiser to assess the work completed and the work remaining. This procedure is required by the lender to validate that the borrower’s investment and required equity in the project are appropriate before the lender will issue any advances against the construction mortgage.
Once everything is in order, the draw advance will be issued and costs incurred to that point in the project can paid up.
If you have any additional questions related to construction draws for either residential or commercial construction projects, I suggest you give me a call and I will make sure you get the information you’re looking for.
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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