Building your perfect house:
a dream or a nightmare?
Everyone dreams of building their perfect house. In their mind’s eye, they can see the architectural design, the mix of colours in the all the rooms, the beautiful fixtures and brand-new everything. After searching the market for the perfect builder and the perfect design, many rush to sign the contract to ensure that they get that special rate or that particular lot. They’ve already spoken to their bank and they’ve been approved, so what else is there to do other than sign on the dotted line?
I know that the excitement of building your dream house is sometimes overwhelming. But if you are seriously considering building a home, you need to take a step back and remember to do a few things. First and foremost, do some research on the builders that you are interested in. Talk to your family and friends who have gone through the building process and ask them about their experiences with their builder. You will quickly find that some builders have better reputations than others. A little time spent doing research before you make a large financial commitment could save you a lot of headaches in the future.
Secondly, once you have decided on the right builder for you, you need to read the entire construction agreement that they provide you. Don’t just skim the pages and rely on the realtor or the builder’s agent to tell you what’s in the agreement. If there are sections you don’t understand, ask. Keep asking questions until you are absolutely certain of the entire process involved in building your house.
One of the main questions you need to ask is when can the land be transferred into your name and at what cost? This is very important because most financial institutions will not advance funds on your mortgage until the title has been transferred into your name.
Another important question to ask is, how long before you have to make a payment? Depending on the builder, some contracts say that payment must be made in as little as three days while others give the purchaser at least 14 days. This is very important because if payment is not received on time, you will be responsible for paying interest on the delayed payment.
Secondly, when talking to your bank, credit union or mortgage company, ask them to explain to you the entire process from their perspective. When purchasing a house that is already built, the mortgage proceeds are typically advanced either at the date of possession or shortly after the date of registration, depending on the circumstances. However, when you are building a house, the process involved for a construction mortgage is different. Most builders implement a three or four stage draw system wherein they request a certain amount from the purchasers after they complete a certain stage of the house. For example, once the basement has been built, the first draw may be requested. Make sure that when you obtain mortgage financing your mortgage specialist tailors your mortgage to your particular situation.
Consider the following example: Your contract states your next draw is $50,000. The bank’s inspection determines that not enough of the house has been build. Consequently, they will only release enough funds based on their inspection. In other words, if your contract states that you need to pay $50,000 but your mortgage states that 55% of the house must be built in order to obtain the full draw proceeds and the inspection revealed that only 45% of the house has been complete, the bank will advance less than the $50,000. In our example let us assume the bank advanced only $40,000. It is very important to note that even if the bank advances less than the requested draw, the purchasers are still responsible for paying for the fulldraw amount. As a result, in this example, the purchasers would need to come up with $10,000.
How do you avoid this situation? Your lawyer could ask the builder to waive any interest payments on any amounts not advanced by the bank as a result of their inspection. This, however, needs to be negotiated before the purchasers finalize their contract with the builders. Also, not all builders are willing to agree to this amendment. Alternatively, the purchasers can arrange a line of credit with their bank that they can use if the situation arose. Any part of the line of credit that is used during the construction period would be repaid once all the mortgage proceeds have been advanced.
You will also need to speak to your mortgage specialist about the funds required to transfer the land into your name. Will it be part of the mortgage? Do you have to get a separate loan? Or, do you need to use your own savings? Find out the answer. Also find out how much the monthly payments and interest payments will be for such a short-term loan.
One of the major attractions to a custom-built house is the chance to make all the little changes you want – whether it’s the colour of the wood, the type of glass in the showers, the type of countertop in the kitchen or a dozen other choices. However, before you agree to any of these changes or extras, find out exactly how much this will cost you. Remember, the price that is advertised is for the base model. All the little changes you make will cost you more. Get a written estimate and then decide whether or not you will pay for those changes from your own funds or if you want that included in your mortgage. If you want it included in your mortgage, tell your mortgage specialist immediately. Changes to your mortgage after it has been approved and registered could lead to problems.
Finally, you will need to hire a lawyer to do all the legal work involved. I strongly urge everyone to find a lawyer and speak to them about your plans before you sign anything. After you sign the contract, it may be too late to do anything about it. The most prudent course of action is to have your lawyer review the construction agreement before you sign it. If, however, you are unable to show your lawyer the agreement, make sure that you place in the contract that it is “subject to lawyer approval.” These four simple words will allow the lawyer to review the contract and raise any issues with the builder’s lawyer. The construction agreement is not effective until your lawyer provides his or her approval.
There is more involved in building a house than picking out the colour of the walls or the type of wood you’d like in the family room. Your financial institution and your lawyer will both play important roles in the process. If you remember anything from this article, remember this: Get your lawyer and mortgage specialist involved as soon as possible. Early involvement can save you a lot of headaches and will hopefully keep your dream house from turning into a nightmare.
The content of this article are not intended as legal advice and is for information purposes only. Should you require legal advice on a specific issue relating to the contents of this article, please seek the services of a legal professional.
Alona C. Mercado is a lawyer practicing in Winnipeg with the law firm of MONK GOODWIN LLP. She was called to the Manitoba Bar in 1999 and the Ontario Bar in 2003. Her preferred areas of practice include wills and estates, committees, real estate and immigration law. Alona can be reached at (204) 956-1060 ext. 233 or firstname.lastname@example.org.