What extra documents are needed for construction?
Joel Olson • July 28, 2017
When doing a construction mortgage, there are several other documents that you will need to supply:
Some of these documents cannot be supplied till after financing is approved, but all documents must be supplied
prior to a second draw.
For a look at how construction works check out our video on it:
http://www.showme.com/sh/?h=QFHycdc
- Blueprints/Plans
- You must have plans for your house that you are building. The plans that you submit to us, must be the plans that have been approved by the city. They are also the plans that the appraiser will rely upon.
- Construction Contract - You must have a contract with the builder you are using outlining all costs, timelines, and terms they are wanting from you. Common issues with builder contracts are:
- Cost Plus Contracts - This is where a builder has the ability to increase the cost as the project goes. There is really nothing more dangerous than this. A contractor will need to provide you with a Fixed Cost Contract , which means the price is fixed the same. However, you must be aware that if you change anything in the contract a contractor can change their price.
- Builders Liens - The government requires 10% to be held back of every draw. When a contractor puts in the contract that you are to ignore this, be aware - this is illegal . Here is a great article on how this can effect you: http://www.lawsonlundell.com/media/news/253_BCBuildersLienAct.pdf
- Payment Schedule
- You will generally be given four different draws at quarterly stages. Unless, you have cash reserves in which to pay in the interim, a construction mortgage will not allow getting paid every two weeks or weekly. Payment are made on completion and not on time frame.
- Detailed list of quotes and contractors building the house
- The above contract should have it, but if you are
self-building you will have to supply.
- Building Permit
- Home Protection Office Registration
- You must register and receive a certificate for this.
- New Home Warranty
- You must get this regardless of whether you are self-build or contractor-build.
- Site Survey
- Cost of Construction Fire Insurance
- You must get insurance PRIOR to building on the lot.
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If you're looking to buy a new property, refinance, or renew an existing mortgage, chances are, you're considering either a fixed or variable rate mortgage. Figuring out which one is the best is entirely up to you! So here's some information to help you along the way. Firstly, let's talk about the fixed-rate mortgage as this is most common and most heavily endorsed by the banks. With a fixed-rate mortgage, your interest rate is "fixed" for a certain term, anywhere from 6 months to 10 years, with the typical term being five years. If market rates fluctuate anytime after you sign on the dotted line, your mortgage rate won't change. You're a rock; your rate is set in stone. Typically a fixed-rate mortgage has a higher rate than a variable. Alternatively, a variable rate is not set in stone; instead, it fluctuates with the market. The variable rate is a component (either plus or minus) to the prime rate. So if the prime rate (set by the government and banks) is 2.45% and the current variable rate is Prime minus .45%, your effective rate would be 2%. If three months after you sign your mortgage documents, the prime rate goes up by .25%, your rate would then move to 2.25%. Typically, variable rates come with a five-year term, although some lenders allow you to go with a shorter term. At first glance, the fixed-rate mortgage seems to be the safe bet, while the variable-rate mortgage appears to be the wild card. However, this might not be the case. Here's the problem, what this doesn't account for is the fact that a fixed-rate mortgage and a variable-rate mortgage have two very different ways of calculating the penalty should you need to break your mortgage. If you decide to break your variable rate mortgage, regardless of how much you have left on your term, you will end up owing three months interest, which works out to roughly two to two and a half payments. Easy to calculate and not that bad. With a fixed-rate mortgage, you will pay the greater of either three months interest or what is called an interest rate differential (IRD) penalty. As every lender calculates their IRD penalty differently, and that calculation is based on market fluctuations, the contract rate at the time you signed your mortgage, the discount they provided you at that time, and the remaining time left on your term, there is no way to guess what that penalty will be. However, with that said, if you end up paying an IRD, it won't be pleasant. If you've ever heard horror stories of banks charging outrageous penalties to break a mortgage, this is an interest rate differential. It's not uncommon to see penalties of 10x the amount for a fixed-rate mortgage compared to a variable-rate mortgage or up to 4.5% of the outstanding mortgage balance. So here's a simple comparison. A fixed-rate mortgage has a higher initial payment than a variable-rate mortgage but remains stable throughout your term. The penalty for breaking a fixed-rate mortgage is unpredictable and can be upwards of 4.5% of the outstanding mortgage balance. A variable-rate mortgage has a lower initial payment than a fixed-rate mortgage but fluctuates with prime throughout your term. The penalty for breaking a variable-rate mortgage is predictable at 3 months interest which equals roughly two and a half payments. The goal of any mortgage should be to pay the least amount of money back to the lender. This is called lowering your overall cost of borrowing. While a fixed-rate mortgage provides you with a more stable payment, the variable rate does a better job of accommodating when "life happens." If you’ve got questions, connect anytime. It would be a pleasure to work through the options together.
