Now that spring has apparently arrived, thoughts of building one's own house may appeal to you. Before you go out to get quotes on construction materials, and labour, please read on.

It is a wonderful time to entertain getting into the housing market. Sales of new and used units are down substantially over this time last year. Getting a "bare bone' quote on material or labour to build your own house will be much easier this year than last. If you are shopping with cash in hand, or available borrowing power from a line of credit, now is the time to start. If you must borrow the money to get going, there are several pitfalls in your way. Remember that the lending institution that is becoming your partner in this venture must answer to its shareholders, and the law. Whether your final mortgage is considered conventional (ie 25% equity) or high ratio (less than 25% equity), either way you will probably be asked to pay for Canada Mortgage & Housing coverage. You may be wasting money!

You must remember that no lending institution that accepts deposits from Consumers can lend you more than 75% of the value of the work-in-place. This means that at no stage during construction can a normal lender exceed 75% of the value of the security; and the lender must be satisfied that there is enough money in their approval to finish the project (cost to complete) should you happen to quit mid-stream.

Normally, the lender will lend out money in three stages, the first being once the footings and foundation (including the well and septic systems), the second at the roof stage (including all the electrical and plumbing rough-ins), and the last at completion stage. All the way through construction, the lender must retain at least 10% of the value of the advance in order to protect itself against construction liens. The 10% on the last draw will be released about one and a half months after completion. Most contractors are used to waiting at least that long to get their money, so their bid for the job will reflect the wait.

The definition of work-in-place is not the amount of money that you have already spent, rather, it is the value to somebody else if they had to take it over. The definition of cost to complete is not the amount of money you still have coming from the construction loan, it is the amount of money somebody else would have to spend to complete the job. There is a fundamental difference between what you construe as being fair, and the way the lender must think in order to protect its depositors. Construction loans are a pain in the neck for both lender and Consumer. The lending officer who wants to please you, the applicant, may give the impression that the construction loan is an ordinary request for mortgaging. It is not! The Consumer may be looking for positive vibes from the lender in order to proceed, and may get it!

When I interview potential clients who wants to build, I normally try to test their resolve and their cash reserves before we go ahead and arrange a construction loan. If the building lot and development fees have not been fully paid as yet, we normally will tell our clients to wait, or get a partner with money to back them. Next week we will discuss another way to achieve home ownership, by using off-site security during construction. Please wait to read that article before you start building your own home.