Has your entrepreneurial spirit got you thinking of building your own house this year? Some say that the cost of the lot, building materials, and the labour is far inferior to the value of the finished product. The statement may indeed be true if you are building with CASH. Few of us happen to have this commodity called cash, so we have to approach our friendly neighbourhood banker to ask for a "construction loan".

A construction loan is a series of personal loans, each one greater than the one before, to a maximum loan amount, until the house is built. Only when the house is 100% complete can a normal mortgage be registered. The final mortgage will be for the maximum loan amount established at the onset. The format for the construction loan is as follows:

a) no advance (also called a "draw") can exceed 75% of the value of the security,

b) prior to each draw a new appraisal must be completed, indicating the value of the work in place and the cost to complete the project.

c) each draw will necessitate a freeze (called "holdback") of 10% of the draw amount, to protect against you being sued for non payment of construction materials or labour.

At no time will the cost to complete, coupled with the funds already advanced exceed the maximum loan amount.

Usually there are four draws....one at the footings/basement stage, the second at the completion of the framing stage (inclusive of windows and doors), the third when the house has been completed, and the last draw is 45 days after an occupancy permit has been

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issued by the municipality. I would strongly suggest that prior to building your dream home you pay off the lot with your own resources and that you have at your disposal $25,000 to $50,000 worth of unsecured lines of credit or untapped limits on credit cards. Without the above you will probably run out of money prior to completion. This will put you at the mercy of suppliers or expensive second mortgage lenders. Your dream home at this point can turn to a nightmare. Don't forget the golden rule...if at any draw period (whether it be the first draw or the last), the cost to complete the project (determined by the lender's appraiser) added to the funds already advanced, must not exceed the maximum loan amount. Suppose that your have already received $50,000 of your $100,000 maximum loan (2 draws) and the lender's appraiser determines that the value of the work in place is $90,000 (lot, foundation, framing etc) and that according to your plans the cost to complete the project is $65,000, your project just ended. Even if the value is there, the cost to complete plus the funds already advanced ($65K + $50K) exceeds the maximum loan amount ($100K) by $15K. The lender will want proof that you have the $15K at your disposal and will insist that you spend that money first.

The lender may also have a problem with you doing your own labour. Follow your plans, and don't make unnecessary changes after you start. Try to get all your suppliers, and labour force tied to maximum contracts. Building your own home may indeed make you some money, but make sure you have the money to build before you start.