By: Robb Nelson
Building you own home? Let us explain why private financing is used vs bank financing. There is something primally satisfying about building your own home as you get to take a blank slate of land and turn it into the home of your dreams where everything is laid out the way you want. You get to make all the decisions on how the floor-plan looks! You can design your breakfast nook so it has lots of natural light, you are able to place your rec room as far away from the bedrooms as possible allowing you to sleep in on the weekends while the kids are blaring video-games. But to a bank, your dream home is their worst nightmare, and here’s why:
- Banks often don’t have a dedicated construction mortgage team –
Banks do provide construction financing; however, they very seldom have a specialized team that focuses solely on that type of lending. Why don’t they? Because as far as they are concerned, construction mortgages are much more trouble than regular mortgages are. Construction mortgages tend to involve much more risk as, if something goes wrong, selling a house that is only partially completed is much more difficult than selling a completed one. As a result, most banks don’t want to put time into understanding exactly how they should work.
- Banks have more restrictions –
When banks do provide financing for a construction project, the terms that they offer are usually very restrictive. For example, banks generally want to ensure that you own the land that you are building on outright before going forward, and they usually don’t provide any financing at registration. This can also mean that you’d need a different source of funds to get your project to a point where banks will actually finance it, this can mean ensuring your home has a foundation or is framed before getting a draw from the bank. Furthermore, banks will not allow ‘Self Builds’, they will only provide financing to Tarion Registered Builders. This means that no matter what experience you have, a professional construction company needs to be involved.
- Banks have stiff draw schedules –
For the most part, banks will stick to a strict schedule consisting of three draws for financing any construction. This means that if you run short of funds before reaching the next milestone in your project, you can be stuck until you find another source of money to draw from to reach that milestone and get the next draw from the bank.
So, the bottom line is that banks will rarely touch a construction loan and if they do it can cause some real difficulties. Instead, going with private financing will allow you much more freedom and with people who are educated in construction loan, and the great part is, once the house is completed then bank financing can be obtained!