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Loans and borrowing

Self-builds: How to avoid unpleasant surprises

June 5, 2017
Adèle Manseau
Desjardins Group

Have you been dreaming of building your own home—or at least part of it? Have you figured out your plans? What about financing?

Before launching into this type of project, you'd better take a look at your needs and, most importantly, your ability to pay.

Before launching into this type of project, you’d better take a look at your needs and, most importantly, your ability to pay. Daniel Desautels, Senior Manager of Business Development at Caisse Desjardins du Réseau municipal, answers our questions on the topic.

 Question: Where should we start?

 Answer:  A good practice is to get a mortgage pre-approval so you know exactly how much you can spend.

“If the person is already a homeowner but their house hasn’t sold, they could apply for financing to purchase the land for their new home, with certain conditions. However, if they haven’t looked into their borrowing capacity before starting the project, they could end up with land that they can’t afford to build on.”

Self-builds can be very gratifying but the require lots of energy and know-how. You need time and proper planning. It’s crucial to do a detailed breakdown of all the costs for each step of the construction. The site plan must comply with municipal regulations.

The same principle applies when it comes to financing. It’s important to take the time to meet with your advisor to get detailed information on the steps you need to take, the documents to provide and your financing options.

 Question: What documents are required to apply for financing?

 Answer:  First of all, the project needs to be evaluated. Self-builders must provide plans and cost estimates prepared by specialists, detailed construction costs, municipal construction permits, the schedule or site plan, and the offer to purchase or the deed of sale for the land if the member already owns it.

Other documents will be required to obtain financing, such as the notice of assessment or leases and tax bills for income properties, if applicable. For rental constructions, builders require a building contractor’s licence from the Régie du bâtiment du Québec for owner builders. The list of required documents may vary depending on the lender and project.

 Question: How does the financing work?

  Answer:  “Financing is based on construction costs. There are different ways to finance the land, depending on the financial institution. At our caisse, self-builders can get a mortgage that will then be adjusted to include construction costs,” says the expert.

Following that, progressive disbursements will be made at each step of the project.

 Question: What are the main pitfalls to avoid?

- Involuntary or voluntary overspending:
The first refers to unexpected costs that pop up during construction, such as a problem with foundation work or a wrong estimate for electricity or plumbing. The second falls under the “while we’re at it” category that is so tempting during construction. While we’re at it, why not use more expensive materials—they’re so much nicer!

- Taking advantage of deals…too early:

The ceramic tile for your new kitchen is on sale and you don’t want to miss out. Be careful! Using construction funds for finishing materials could give you less to play with at your next progressive disbursement.

When the appraiser visits the work site, they estimate the percentage of work completed in order to authorize the next disbursement. The decision is based on what’s been installed so far, not on the inventory on hand. So, if the next disbursement was not earmarked for finishing, your financing will take a hit.

“To avoid these traps, we suggest that you always add 10% to 15% more to your cost estimate to make sure you’re covered. We strongly recommend getting liability, fire and theft insurance to make sure you and everyone working on the site are protected,” says Mr. Desautels.

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