How Construction Mortgage Completion Stages Work

Progress draw construction mortgage in Canada

When it comes to progress draws, residential construction on a house generally has three stages:

  • Roof Stage / Roof Tight (About 35% complete). A survey is required before the first draw.
  • Intermediate / Lock Up (About 65% complete, before the drywall is installed). If you’re building on acreage, you have to have the septic system and the well in by this point.
  • Final Occupancy / Completion (Most lenders don’t send the final advance until the home is 100% complete, with a 3% allowance for seasonal issues). Seasonal issues, or holdbacks, are always minor in nature, affect the outside of the property and have to do with the weather.

Draws are issued by the lender on the basis of the Appraiser’s Percentage Complete Inspection Report

Phases of Construction

Phase 1

  • Excavation
  • Foundation
  • Framing
  • Doors / Windows

Phase 2

  • Mechanical / Electrical
  • Interior Walls / Stairs
  • Exterior Finish (House Wrap)
  • Garage

Phase 3

  • Insulation / Drywall
  • Fireplaces
  • Plumbing
  • Exterior Finish / Siding

Phase 4

  • Cabinetry
  • Lighting
  • Flooring Appliances

Phase 5

  • Decks / Patios
  • Landscaping
  • Kitchen Island / Trim

Draw Process

Draws generally take place every 30-45 days. Before the draws, though, an appraiser, architect or municipal building inspector will check the property, and draws will occur on the basis of project completion percentage (see above).

Lien Holdbacks

An appraiser must visit the property after each draw, and a lien holdback generally applies, usually 10 percent for each draw. These take place for deficiencies, and the solicitor holds the funds until the project is complete or the owner secures the occupancy permit.

Submitting Your Application

Required Initial Documents before Submission

  • Completed mortgage application
  • Appraisal as at completion, if available (new appraisal required if the existing one is older than six months)
  • Current credit report for all borrowers and guarantors
  • Title search (if the borrower owns the property)
  • Detailed construction budget
  • Copy of purchase offer with all addenda and amendments
  • Detailed Deal Summary

Required Additional Documents before Final Approval

  • NOA for current year showing no CRA debt
  • Builder resume and information
  • Complete set of legible drawings (11” x 14” or smaller)
  • Copy of purchase offer with all addenda and amendments, for the land
  • HPO registration (only applies in BC)
  • Copy of all construction contracts
  • Proof of new home warranty insurance (Alberta and BC)
  • Copy of MLS listing information
  • Pre-sold build: confirmation of deposit and identity of the holder
  • Owner-build: Confirmation of re-finance or new financing for mortgage after construction
  • Details of vendor take-back or second mortgage
  • Corporate financial statements and incorporation documents, when applicable

Breaking Ground

If you’re applying with a bank, you must own the land free and clear to get a construction mortgage.

Private lenders can advance some of the land’s value at registration.

Land will need to be fully serviced with some lenders. Some elements have to be included, such as soft costs, architect/engineer fees, city permits, realtor/solicitor fees, appraisal/inspection fees, initial construction costs and even the first stage of construction (usually 35%) with your own funds.

When it comes to cost overruns, you need either additional liquidity or the ability to bring in credit no less than 10% of the construction costs. You’ll have to make interest-only payments on all advances until you’ve set up takeout financing with another institution.

You have to have 25% down payment or equity in the land to start construction financing.

You need a cash reserve, usually 15 to 20 percent of your total target. This can also exist as a line of credit.

Most private lenders will issue as much as 75% LTC, although some will go up to 80. Outside major urban areas, though, this number will be lower.

Traditional bank lenders will finance as much as 95% of the costs with mortgage insurance – and you have to pay those premiums as the borrower.

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