Construction Mortgage Toronto

As the term suggests, a construction mortgage is a loan given to facilitate the construction of a building.
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What is a Construction Mortgage (Builders Mortgage) in Toronto?

When a lender advances you a construction mortgage, he is giving you a line of credit that you can draw down up to the full amount. You are not obligated to use the maximum amount and you cannot draw past the maximum amount. You can advance the funds as the construction progress, such as foundation, bringing up the walls, roofing, finishing, and so on. The progress advance basis on which a construction mortgage is given ensures that the builder does not use the money for other purposes, protecting the lender. If you intend to buy the land you want to build on, the lender will avail the first draw to assist you to buy the lot. The lender has a vested interest in the construction since the building will be the collateral. To ensure that the construction is being done to standard, the lender engages a building inspector to ensure the percentages that the construction has progressed. The borrower is the one who meets the inspection costs. If you already own the land, the typical draw is as follows:
• The first draw is 15% to complete excavation and the foundation.
• The second draw is 25% to do everything up to the roofing and weather protection.
• The third draw is 25% to complete drywall/plaster, furnace installation, exterior wall cladding, plumbing, and initial wiring.
• The fourth draw is 20% to complete doors, kitchen cupboards installations, and the bathroom. The fifth draw is 15% to complete exterior and seasonal work.

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What You Will Need for a Construction Mortgage Approval?

When it comes to a construction mortgage, a decent income and a good credit score won't be enough. Different lenders have different eligibility criteria for construction mortgages. Some qualification criteria are stipulated by the regulator. You will need to provide your income, assets, and debt information – this is the information that the lender requires to determine your creditworthiness. Lenders refer to this as the Income, Credit, and Equity (I.C.E.) requirement. Some lenders may only require equity in the property. You need a signed construction or purchase contract with the developer or builder before the mortgage can be approved. The builder must be licensed and reputable. Unless you intend to be your own general contractor (in which case you will not be eligible for a construction mortgage), you must give a list of the builder’s past and current projects as well as a profit and loss report. You must demonstrate that arrangements are in place to make up any timing and cash differences between what your builder/supplier/tradesman/contractor requires to start or continue with the project and the money the draw schedule provides you. Once an inspector/appraiser for the bank has given the percentage completion (which is done using a fairly standard table), the draw amount is then calculated and will be disbursed to your lawyer (less a builder's lien holdback which is a legal requirement). You, therefore, need to hire a lawyer for the duration of the construction. To qualify for a construction loan Toronto, the home will need to be New Home Warranty program (NHW) approved. If you are building a house for yourself to live in, you may not need to get New Home Warranty (Tarion). Your contract should have a detailed description of the project, also called a “blue book”. This contract will detail aspects that have an impact on the loan such as:

  • The construction amount (including the cost of land and construction)
  • An inventory of materials to be used, subcontractors, and suppliers
  • Conformity to the National Building Code of Canada and other Ontario codes
  • Profit projections if you will be selling or leasing the property
  • Construction commencement and completion dates (which impacts the interest-only grace period the lender may offer)
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