Last week we discussed the mechanism for building one's own house using a "construction loan". We learned, amongst other things, that unless you own the lot outright (no mortgage), and that you have at your disposal $25K to $50K worth of lines of credit or unused credit card limits, you will probably run out of money prior to finishing your dream home.

There exists a much better way of building your own home! The system is called "off-site security lending". In other words, don't mortgage what you are building, mortgage some other house during construction. Here's how it works and why you should attempt to find off-site security.

The lender cannot advance greater than 75% of the available security, and must always retain enough money within the original maximum loan amount (approved mortgage amount) to finish the project if you go overboard. During construction, until the project is finished, the value of the work in place may very well be lower than the money already spent in labour and materials. If a house is already built, and has no mortgage (or very little mortgage), then the full value of that house is available to accept a mortgage. Most lenders will allow you up to 75% of its value (less any existing mortgage).

Let us suppose that Uncle Fred's house is paid in full, and you are his favourite nephew, he could allow you to put a mortgage on his property for the amount you require to build your home. During construction, you would allow Uncle Fred to take a mortgage over your new property. Instead of visiting your lender every time you need money (as in the case of the "construction loan"), you simply visit Uncle Fred and get him to write you a cheque for your needs.

Now Uncle Fred may be your favourite uncle, but word has it that he is also an intelligent man. He will want to see how and when you can get your own mortgage. Most lenders will grant you a "pre-approved" mortgage commitment, even before you start your project. The lender will take all the necessary steps to qualify you on the loan amount. The security itself must be appraised. Appraisers can come up with a value of the completed project by studying the plans of the house you will eventually build. In your case, the commitment would only be conditional upon you finishing the house. Forty-five (45) days after completion of your house (completion is when you can get an "occupancy certificate" from your municipality), this new mortgage with ABC Lender can now be activated. You put a mortgage on your newly completed house and have those funds pay off the mortgage on Uncle Fred's house.

There are several advantages to this method of building your own home. You need not hope that each draw passes the scrutiny of the lender, since your lender is only involved after your home is built. You need not get the property appraised each time you need money. You need not hire a lawyer each time you need money. And, the best part of it all, when you go shopping for prices on materials or labour, you have the cash to back you up. You don't have to wait for the lender to advance on a draw, you don't have to wait on an appraisal, you have the cash to pay as you go. Suppliers and labour always have a two tier bid system. One, if you are paying cash, and the other, if you are paying with hope that you can get enough money off a draw.