When planning to build a house where you require a mortgage, you will need to arrange for a construction draw mortgage. This type of mortgage permits advances at stages in construction to allow the borrower to pay the builder or trades in stages. The lender advances set amounts at set stages once the borrower can confirm, through an inspection, that the house construction has reached a stage where there is sufficient value in the property to justify the amount advanced.
When building with a construction draw mortgage, you should consider ensuring that you have sufficient draws to meet the payment demands imposed by the builder or the subtrades. Often trades will expect payment within a short period of time following completion of their subcontract, and trades often rely on the borrower paying these funds in order to pay their material suppliers or employees. When a borrower cannot meet payment timeframes, trades may refuse to do additional work until paid, or may even be forced to utilize their right to file a builder’s lien on the property to protect their interest. When a lien is filed, a lender will not advance subsequent draws until arrangements are made to pay out the lien.
A key consideration on a construction draw mortgage is the requirement a lender imposes on a borrower to implement the statutory lien holdback of 10%. Some lenders will permit the borrower and builder to handle the lien holdback themselves, which gives the borrower some flexibility when handling loan proceeds. Other lenders will make it a requirement that the lawyer for the lender hold 10% of each draw in trust pending completion of the entire build. In this situation, a borrower may not have sufficient funds to pay all trades owed money at the time of the advance. These trades may then file a lien which will affect a borrower’s ability to obtain subsequent advances to pay subsequent bills. A borrower should ensure they understand the lender’s requirement for builder’s lien holdbacks prior to committing to using a lender for the construction mortgage, and should confirm with the builder that the lender’s requirements can be met so that liens will not be an issue during the build process.
Borrowers should anticipate a legal fee of about $160 at each draw, which amount is charged to conduct the necessary searches of title a lender will require before making an advance, as well as covering legal costs associated with obtaining funds from the lender and paying these through to the borrower.
Borrowers should also allow for several days from the time the draw request is made, as the lender will need to arrange for an inspection, then will have to provide the law firm with instructions for the advance, then actually advance the funds once the law firm has confirmed title is clear.