Construction Loan Financing:

Here we go again.  Every year, about this time, I am asked to remedy what should not have happened in the first place.  Young couples get caught up in what should be a pleasant experience but ends up being, more times than not, an absolute nightmare: the construction of their first home. Some are under the assumption that building one's house is easy.  Lenders, as a general rule, are not protected against liens until after the house has been built for at least 45 days. As a result, lending institutions are very diligent when seeking protection during the construction period. Your loan and progress will be monitored very closely, and not only does the lender want to see the progress, but compared to the overall loan facility (limit), the lender also must insure that there is enough money to finish the project at any stage of the game.  I would like to share with you some guidelines that could avoid heartache, and financial failure.

If your lot is not paid in full before you started building, you'll probably run out of money before you finish.  The lender will want to pay the land from the first advance, leaving less than an adequate amount to continue to the next stage.

If you are building your own home [general contractor], you probably will find difficulty in locating a lending institution to grant you the loan, unless you are in th construction business, full-time.  Several potential homeowners want the shell of the house to be constructed by an outside source, while leaving the interior to be completed by themselves over a period of time.  Lending institutions will find much difficulty in accepting this arrangement, because the longer the project takes, the more chance of construction liens, or loss of heart by the homeowner.

If your new home is a pre-fabricated house, you may need money to pay for the unit before it gets delivered to your lot.  The bank, on the other hand, will want the house sitting on the foundation and hooked up to services (well & septic, hydro, and gas) before it releases the bulk of the money. Again the reason being the potential for construction liens, which take precedence to the mortgage.

If you don't have access to unsecured lines of credit for at least $20,000 or $25,000 you'll probably run out of money.  If you a regular reader of this column, you know that I regard the mortgage system as a challenge, and in most cases, the system can be beat.  When it comes to construction financing, the difficulty level escalates dramatically.

I strongly encourage you to visit my website and under "Sun Articles",   go to the "construction financing" section and at least be aware of your options.  You'll find that I endorse "off-site security financing".   The easiest at least expensive method of building your new house is by using another house for security during construction.  With the advent of "title insurance", drawing equity from a house that is already built (usually a family member) by way of a secured line of credit is relatively easy and inexpensive.  Once you have access to this source of money, you can take as much time as necessary to build your own house, granting your host the comfort of a mortgage on the house being built.   In other words, if your father granted you access to the equity in his house for you to build your new residence, then while you are building, your father gets a mortgage on your lot.  Once your house has been completed, then it is relatively easy to now mortgage this newly built house in order to payback your Dad.  Good luck.