Understanding the Construction Financing Process
Building your own home is an exciting and rewarding project. We’re here to help you understand the process of financing the construction of your new home so that you can get started with confidence and proceed with peace of mind. You may have some experience in obtaining mortgage financing but as you’ll see, construction financing is a more detailed process, with several important milestones that don’t take place when you buy an already existing home. We’ve created this guide to help you plan your project and understand how construction financing works. Now is the time to plan It’s never too early to plan. Complete the construction worksheet to ensure you have a clear understanding of how your advances work so that you request the right mortgage amount. What to expect When you build your own home, there are many more steps and expenses than if you buy an existing home. In the simplest terms, a typical mortgage is advanced in one lump sum. Construction financing is different. At TD Canada Trust, the total amount borrowed to complete a project is usually advanced in three stages within one year. Typical Mortgage
You receive all of the money you borrowed at the time you obtain the title to the property. Construction Financing
At TD Canada Trust, you pay the up-front costs, then receive up to three advances. First advance at the Rough-in stage 1. Second advance at the Drywall stage 2. Third advance at the Completed stage 3.
Your home is at the Rough-in stage when the foundation, sub-floor, framing, sheathing, roof, roughed-in electrical and plumbing are completed. This is typically 35% complete. 2 Your home is at the Drywall stage when the exterior completion, pouring of the basement floor, and installation of the heating source are completed. This is typically 65% complete. 3 Your home is at the Completed stage when the finished interior doors, floors, carpentry, painting, heating, plumbing, electrical, walks and driveways (subject to season) are completed. This is when the house qualifies for an occupancy permit. 1
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Determining what you need to get started During the application process, you will need to understand the initial costs that you will be responsible for. Land To secure construction financing you are required to own the land, as TD Canada Trust will need to register a first mortgage on it. Servicing The land you intend to build on needs to be fully serviced. This includes site preparations and municipal services such as septic service, water connection, sewer connection, hydro and gas service. Soft costs These are out-of-pocket expenses for services and charges you are likely to incur at the outset of, and throughout, the construction phases. Depending on your plans and the location of your home, these will likely include – • Property taxes • Municipal permits
• Fees for architects and engineers • Fees for realtors and solicitors • Fees for appraisals and inspections
Initial building costs You are expected to finance the initial stage of construction (approximately 35% of construction) with your own money. Cost overruns We recommend that you set aside an additional 15% of the estimated construction costs to cover unexpected overruns. Interest costs You are required to make interest-only payments on all amounts advanced until your regular principal and interest payments begin. In addition to the costs already outlined, you will also need to budget for lien holdbacks.
Understanding the Construction Financing Process
Lien holdbacks Your solicitor is required to hold back some of the money advanced at each of the Rough-in, Drywall, and Completed stages of your construction project. This money is held in reserve in the event that a contractor or supplier claims a lien on your property. A lien is a claim by a contractor against the property to secure repayment of unpaid construction costs. The amount of your lien holdback and the number of days that your funds will be held in trust varies by province. TD Canada Trust will instruct your solicitor to hold back a percentage based on the chart below. Ask your solicitor for details. Province
4
Percentage of Holdback
The application Here’s what you should plan to bring to your first meeting with a TD Canada Trust mortgage representative. All information associated with the construction • Construction contract, including costs • Construction plans or blueprints • Quotes for labour and material if you are acting as the general contractor • Site preparations, including municipal services for the lot (e.g. excavation, septic service, water, sewer, hydro, gas, etc.) • Evidence of ownership of the land and/or a copy of the purchase agreement with evidence of available funds Other requirements to help fulfill the application for construction financing • Confirmation of required funds to complete 35% of construction (the Rough-in stage) • Confirmation of income/employment • Name, address and telephone number of your solicitor
Alberta
10
British Columbia
10
Manitoba
7.5
New Brunswick
20
Newfoundland
10
Nova Scotia
10
Ontario
10
Prince Edward Island
20
The appraisal
Quebec
15
Saskatchewan
10
Determining the estimated value of your completed home TD Canada Trust will obtain an appraisal to estimate the value of your completed home, including the land.4 To arrive at an estimate, your appraiser will review your construction plans and blueprints to understand the type of home you are building.
For the purpose of the mortgage application, the value of the completed project is the lesser of a) the cost to construct including land value or b) the appraised value.
2
As we familiarize ourselves with the details of your project, we can tell you what, if any, other documents specific to your application may be required.
Understanding the Construction Financing Process
Your first advance – the Rough-in stage
Your second advance – the Drywall stage
When you have completed the Rough-in stage, we will send an appraiser to your home to inspect the property and confirm that the Rough-in stage is complete.
When you have completed the Drywall stage, we will send an appraiser to your home to inspect the property.
Up to this point, you will have paid all expenses from your own resources. TD Canada Trust will release your first advance of funds to your solicitor, who will keep a percentage of it as a lien holdback. The percentage varies by province. At this point monthly interest-only payments will commence. The amount of your first advance is determined by a formula based on the total requested mortgage amount and the remaining cost to construct your home.
3
TD Canada Trust will release your second advance to your solicitor. Once again, a lien holdback will be applied. The amount of your second advance is dependent on the requested mortgage amount, the amount of the first advance and the remaining cost to construct your home.
Your third advance – the Completed stage When you have completed your home, we will send an appraiser to your home to inspect the property.
The estimated amount of this advance can be calculated using the easy-to-complete worksheet provided.
When the appraiser has determined that your building is complete, TD Canada Trust will release the final advance of funds to your solicitor. A lien holdback will again be applied.
Prior to releasing the first advance, your solicitor will need – • Builder’s all-risk insurance assigned to TD Canada Trust • A survey showing the location of all buildings to be constructed • Confirmation that all necessary building permits are in place
Prior to releasing the final advance, your solicitor may request further documentation, which may include – • Well Water Potability Certificate (if applicable) • Flow Certificates and Septic Certificates (if applicable) • Occupancy Permit • New Home Warranty Certificates (if applicable)
It is important that you request the right mortgage amount. Review the examples found in this guide on pages 4 -7 and complete the worksheets starting on page 8 prior to applying for a mortgage so that you understand how the advance schedule works.
5
Subject to third advance bringing the entire funded amount advanced to 86% of the registered mortgage amount.
Release of lien holdbacks All lien holdbacks will be released to you approximately 30-60 days (depending on your province) after your project has been completed, assuming there have been no lien claims made against your property. Anticipating mortgage interest and principal payments By the time you reach the Completed stage, most of your mortgage amount will have been advanced to you through your solicitor. You will be required to start making regular mortgage interest and principal payments shortly after receiving your third advance5.
Construction Financing Example Sheets
4
Here are two examples of construction financing. You can see how much money these two homebuilders receive at each stage of construction. In both examples the homebuilders already own the land. The value of their completed projects is $400,000, which includes $275,000 to construct and $125,000 for the value of the serviced land. Terry is borrowing $300,000. This represents a 75% loan to value. Kim is borrowing $160,000. This represents a loan to value ratio of just 40% and as you’ll see it affects the amount of money advanced at the first and second advance stages. The only difference between Terry and Kim is the mortgage amount requested. The calculations for Steps One and Two are the same for both homebuilders.
Step One
How Much Money Terry and Kim Will Need to Get Started Terry and Kim
What will be the total cost to construct your home? (costs based on builder/contractor quotes or building plans)
A
$275,000
$0
Cost of land (if not already owned) Servicing costs (if not included in construction costs)
+
$0
Soft costs
+
$12,000
Cost overruns [A x .15]
+
$41,250
Cost to complete Rough-in stage [A x .35]
+
$96,250
MINIMUM MONEY NEEDED TO GET STARTED
=
$149,500
! Now that you know the minimum amount of personal resources needed to start your project, you can experiment with various mortgage amounts to see how your advances will work at each stage.
Construction Financing Example Sheets
Step Two
5
Calculate How Much Money TD Canada Trust Retains at Each Stage of Construction
At each stage of construction, TD Canada Trust retains the funds equivalent to the remaining construction costs that are required to complete the project. It is important to calculate these amounts because they will affect the amount of money you will receive at each advance stage.
Terry and Kim
ROUGH-IN STAGE Total estimated construction cost [from line A]
A
65%
Percentage of construction still to be completed
AMOUNT TD CANADA TRUST RETAINS AT THE ROUGH-IN STAGE (Remaining cost to complete [A x .65])
$275,000
B
$178,750
A
$275,000
DRYWALL STAGE Total estimated construction cost [from line A]
35%
Percentage of construction still to be completed
AMOUNT TD CANADA TRUST RETAINS AT THE DRYWALL STAGE (Remaining cost to complete [A x .35])
C
$96,250
A
$275,000
COMPLETED STAGE Total estimated construction cost [from line A]
0%
Percentage of construction still to be completed
AMOUNT TD CANADA TRUST RETAINS AT THE COMPLETED STAGE (Remaining cost to complete [A x .00])
D
$0
Construction Financing Example Sheets
Step Three
6
Construction Stages and Lien Holdbacks
At each stage of construction, you may be eligible for a mortgage advance. This will depend on the amount of money you are borrowing. Each time you receive a mortgage advance, a lien holdback will be held in trust by your solicitor. You will be able to see how the mortgage amounts requested by Terry and Kim will affect the amount of their advances.
Terry
Kim
FIRST ADVANCE Mortgage amount (selected by customer) Minus remaining construction costs [from line B]
–
First advance to your solicitor [E–B] If the amount is negative, enter “0” Minus the lien holdback [F x .10 for illustration purposes] (Refer to the table on page 2 for the percentage applicable in your province)
–
TOTAL FUNDS AVAILABLE TO CUSTOMER AT FIRST ADVANCE [F–G]
E
$300,000
E
$160,000
B
$178,750
B
$178,750
F
$121,250
F
$0
G
$12,125
G
$0
H
$109,125
H
$0
E
$300,000
E
$160,000
–
–
SECOND ADVANCE Mortgage amount [from line E] Minus amount of first advance to your solicitor [from line F]
–
F
$121,250
–
F
$0
Minus remaining construction costs [from line C]
–
C
$96,250
–
C
$96,250
I
$82,500
I
$63,750
J
$8,250
J
$6,375
K
$74,250
K
$57,375
Second advance to your solicitor [E–F–C] If the amount is negative, enter “0” Minus your lien holdback [I x .10 for illustration purposes] (Refer to the table on page 2 for the percentage applicable in your province) TOTAL FUNDS AVAILABLE TO CUSTOMER AT SECOND ADVANCE [I–J]
–
–
Construction Financing Example Sheets
Terry
7
Kim
THIRD ADVANCE Mortgage amount [from line E]
E
$300,000
E
$160,000
Minus amount of first and second advances to your solicitor [F+I]
–
L
$203,750
–
L
$63,750
Minus remaining construction costs [from line D]
–
D
$0
–
D
$0
M
$96,250
M
$96,250
N
$9,625
N
$9,625
O
$86,625
O
$86,625
H
$0
Third advance to your solicitor [E–L–D] Minus the lien holdback [M x .10 for illustration purposes] (Refer to the table on page 2 for the percentage applicable in your province)
–
TOTAL FUNDS AVAILABLE TO CUSTOMER AT THIRD ADVANCE [M–N]
Checkpoint
–
Calculating the Total Amount of Funds Advanced
Funds available to customer at first advance [from line H]
H
$109,125
Plus funds available to customer at second advance [from line K]
+
K
$74,250
+
K
$57,375
Plus funds available to customer at third advance [from line O]
+
O
$86,625
+
O
$86,625
Plus holdbacks [G+J+N]
+
P
$30,000
+
P
$16,000
TOTAL OF FUNDS ADVANCED BY TD CANADA TRUST [H+K+O+P]
$300,000
$160,000
Construction Financing Worksheets
8
Use these worksheets to help you to determine your construction financing needs. We recommend making photocopies of the worksheets so you can explore the effects of various cost scenarios. Bring your completed worksheets to your next meeting with a TD Canada Trust mortgage representative and you’ll be one step closer to making your dream home a reality.
Step One
How Much Money You’ll Need to Get Started
What will be the total cost to construct your home? (costs based on builder/contractor quotes or building plans)
A $
$
Cost of land (if not already owned) Servicing costs (if not included in construction costs)
+
$
Soft costs
+
$
Cost overruns [A x .15]
+
$
Cost to complete Rough-in stage [A x .35]
+
$
MINIMUM MONEY NEEDED TO GET STARTED
=
$
! Now that you know the minimum amount of personal resources needed to start your project, you can experiment with various mortgage amounts to see how your advances will work at each stage.
Construction Financing Worksheets
Step Two
9
Calculate How Much Money TD Canada Trust Retains at Each Stage of Construction
At each stage of construction, TD Canada Trust retains the funds equivalent to the remaining construction costs that are required to complete the project. It is important to calculate these amounts because they will affect the amount of money you will receive at each advance stage.
ROUGH-IN STAGE Total estimated construction cost [from line A]
A $ 65%
Percentage of construction still to be completed
AMOUNT TD CANADA TRUST RETAINS AT THE ROUGH-IN STAGE (Remaining cost to complete [A x .65])
B $
DRYWALL STAGE Total estimated construction cost [from line A]
A $ 35%
Percentage of construction still to be completed
AMOUNT TD CANADA TRUST RETAINS AT THE DRYWALL STAGE (Remaining cost to complete [A x .35])
C $
COMPLETED STAGE Total estimated construction cost [from line A]
A $ 0%
Percentage of construction still to be completed
AMOUNT TD CANADA TRUST RETAINS AT THE COMPLETED STAGE (Remaining cost to complete [A x .00])
D $
0
Construction Financing Worksheets
Step Three
10
Construction Stages and Lien Holdbacks
At each stage of construction, you may be eligible for a mortgage advance. This will depend on the amount of money you are borrowing. Each time you receive a mortgage advance, a lien holdback will be held in trust by your solicitor. You will be able to see how the mortgage amounts requested in Scenario A and Scenario B will affect the amount of your advances by experimenting with different amounts in the worksheet below.
Scenario A
Scenario B
E
E
FIRST ADVANCE Mortgage amount (selected by customer) Minus remaining construction costs [from line B]
–
First advance to your solicitor [E–B] If the amount is negative, enter “0” Minus the lien holdback [F x % of lien holdback in your province] (Refer to the table on page 2 for the percentage applicable in your province)
B $
F
–
TOTAL FUNDS AVAILABLE TO YOU AT FIRST ADVANCE [F–G]
$
–
G $
B $
F
$
–
$
$
G $
H $
H $
E
$
E
$
$
SECOND ADVANCE Mortgage amount [from line E] Minus amount of first advance to your solicitor [from line F]
–
F
$
–
F
Minus remaining construction costs [from line C]
–
C $
–
C $
Second advance to your solicitor [E–F–C] If the amount is negative, enter “0” Minus your lien holdback [I x % of lien holdback in your province] (Refer to the table on page 2 for the percentage applicable in your province) TOTAL FUNDS AVAILABLE TO YOU AT SECOND ADVANCE [I–J]
–
I
$
J
$
K $
–
I
$
J
$
K $
Construction Financing Worksheets
11
Scenario A
Scenario B
E
$
E
$
$
THIRD ADVANCE Mortgage amount [from line E] Minus amount of first and second advances to your solicitor [F+I]
–
L
$
–
L
Minus remaining construction costs [from line D]
–
D $
–
D $
M $
Third advance to your solicitor [E–L–D] Minus the lien holdback [M x % of lien holdback in your province] (Refer to the table on page 2 for the percentage applicable in your province)
–
TOTAL FUNDS AVAILABLE TO YOU AT THIRD ADVANCE [M–N]
Checkpoint
N $
M $
–
O $
N $
O $
Calculating the Total Amount of Funds Advanced
H $
Funds available to you at first advance [from line H]
H $
Plus funds available to you at second advance [from line K]
+
K $
+
K $
Plus funds available to you at third advance [from line O]
+
O $
+
O $
Plus holdbacks [G+J+N]
+
P $
+
P $
TOTAL OF FUNDS ADVANCED BY TD CANADA TRUST [H+K+O+P]
$
$