Construction loans including self builds people dream of building their own home. Some have construction management experience and many have none. The history of lending to self-builders can be described as checkered at best. Inexperience leads to cost overruns, cash shortfalls and schedule delays. This leads to a lot of handholding and conflict, between the lender and the  borrowers.

As a result most lenders simply won’t lend to self-builders and most require New Home Warranty Insurance, charge fees and charge a higher rate to offset the higher administrative costs. (we have lender that doesn’t require NHW).

One of the most common issues faced by  builders is understanding and budgeting for the “cost to complete” calculation of mortgage advances. In simple terms, the lender will always hold back enough of the approved mortgage loan so the project can be completed. Where this becomes a big issue is when the loan is relatively small compared to the overall cost of construction. For example, if the cost of construction is $400,000.00 and the loan amount is $300,000.00 and the project is at lockup (40% complete).   The lender will hold back the cost to complete (in this case 60% (100%- 40% completed) of $400,000.00 which is $240,000.00) So the draw at lockup would be $300,000.00 minus the cost to complete holdback ($240,000.00) for a net draw amount of $60,000.00.  Naturally this often means the owner builder is pushed immediately into  a cash crunch on first draw unless they properly budgeted in advance.   If there has been a land advance, that amount is usually deducted from the first draw, making the cash flow  situation even worse.

Rates run from prime plus 2.5% to prime plus 5% and fees are typically 1-4%. These rates are subject to changing market conditions of course and what rate you would get would be determined by your individual situation.

You can see it’s important to seek out an experienced mortgage broker that understands the cash flow issues, the application issues  and can help you develop a realistic plan that will save you a lot of heartache and expense.  We at the Lending Outlet have been arranging residential construction mortgages for 25 years and can certainly provide the necessary expertise to save you money, time and worry.   Call us to set up an interview.

We will pay referral fees to brokers.