Real Estate

Anyone have experience with Construction Loans to purchase a property and build on it while owning your current home?

  • Last Updated:
  • Sep 18th, 2018 12:47 pm
[OP]
Deal Addict
User avatar
Aug 28, 2012
1666 posts
712 upvotes
Kanata, ON

Anyone have experience with Construction Loans to purchase a property and build on it while owning your current home?

Hi all,

Looking for some pre-advice before visiting our bank regarding construction loans. We are considering purchasing a property nearby and building a house on it.

Some details:
- Currently own and live in our house, valued around $340,000
- Mortage balance $150,000 owing
- Lot value $115,000 - would like to put deposit on it now, build in spring, 2019. (possibly build a garage in fall, 2018 if time permits and we own the property)
- Estimated Construction cost ($400,000-$500,000??? really don't know yet)
- Net annual income $130,000
- Other Debts: Vehicle 1 $10,000, Vehicle 2 $45,000, LOC $0, Credit Cards paid off monthly

Does it make any sense to use a HELOC or private loan to purchase the property now and obtain a construction mortgage later for the actual build?
Would we qualify for a construction loan while still owning, or would we be better off selling our house and renting? We would prefer not to and wait until closer to moving into the new house.
We could live in a trailer on the lot next spring/summer if we decide to sell our house in the spring if it helps.

Just looking for any old plain advice on how to proceed as we're just getting the ideas going now and I don't quite know the whole process moving forward. Will book an appointment soon with the bank, but figured I'd ask my RFD friends first. :)

Thanks!
3 replies
Deal Addict
Jan 13, 2014
1103 posts
290 upvotes
Calgary
I can help you this but unfortunately my credit union only deals in Alberta. Might be better of going to a local credit union and get these numbers worked out. If you like to know our process to get an idea please feel free to PM me. thank you
Deal Addict
Jan 15, 2017
1598 posts
1089 upvotes
The biggest challenge with construction loans is cash flow and managing time lines.

You will need a large down payment to start. Usually at least 20% down. Land and building can be funded together and many times funded separately. It isn't uncommon, for instance, for some lenders to limit land financing to 50% of value. This means a lot value of $115k will need $57,500 down. Some lenders will go as high as 80%, but those tend to be smaller, monoline lenders.

The construction loans process through a series of draws. Draws are pre-determined at construction milestones. In general, the project will need to be appraised to verify that the construction targets have been met and the funds are generally released through your lawyer. Appropriate hold backs will need to happen at each stage, and of course, fees will have to paid at each stage.

Once the construction is complete, you then secure a mortgage against the home to pay off the construction loan. It is very important that you have a clearly defined exit strategy in place so that the mortgage can be easily obtained when needed. There are many risks to this exit strategy - weather delays, material delays, time line delays, - all of which can derail the exit strategy.
Deal Addict
Jan 13, 2014
1103 posts
290 upvotes
Calgary
skeet50 wrote:
Sep 17th, 2018 1:47 pm
The biggest challenge with construction loans is cash flow and managing time lines.

You will need a large down payment to start. Usually at least 20% down. Land and building can be funded together and many times funded separately. It isn't uncommon, for instance, for some lenders to limit land financing to 50% of value. This means a lot value of $115k will need $57,500 down. Some lenders will go as high as 80%, but those tend to be smaller, monoline lenders.

The construction loans process through a series of draws. Draws are pre-determined at construction milestones. In general, the project will need to be appraised to verify that the construction targets have been met and the funds are generally released through your lawyer. Appropriate hold backs will need to happen at each stage, and of course, fees will have to paid at each stage.

Once the construction is complete, you then secure a mortgage against the home to pay off the construction loan. It is very important that you have a clearly defined exit strategy in place so that the mortgage can be easily obtained when needed. There are many risks to this exit strategy - weather delays, material delays, time line delays, - all of which can derail the exit strategy.
Believe it or not you can have a CMHC insured or high ratio construction mortgage. Banks dont tend to finance residential land loans but credit unions can do land loan with 25% down. But yes cash flow is a big concern.

Top

Thread Information

There is currently 1 user viewing this thread. (0 members and 1 guest)