New Construction Financing
Building a home is a complex process; your mortgage shouldn't be.
Before deciding on building a brand new home, work with a local mortgage broker to help you understand the special terms and considerations in construction mortgages.
Imagine your dream home with its luxurious granite countertops and spacious walk-in closet. But have you thought about how your finances will work when building this dream home? Don't worry, I'm here to help you understand the two common types of builder mortgages.
Typically, a mortgage approval is only valid for four months from the original approval date. This works fine if you're moving into a home right away. But what if you won't take possession of your new home for a whole year?
Construction Completion Mortgage
This is where a construction completion mortgages come in. Most banks offer these mortgages specifically for building a home. With this type of mortgage, the terms and conditions won't expire while the home is being built.
When a builder constructs a home using their own funds, the building process can take anywhere from six months to two years. The bank will guarantee a rate for the entire build time to offset the risk of interest rates rising. The interest rates offered for construction completion mortgages are higher than the typical 120-day rate holds, but the good news is that the rate won't go up if rates rise.
I we review all completion mortgages 90 days before clients take possession of their new home. If rates are lower than the construction completion mortgage rate and the client still qualifies, I will get them the lower rate. I stay in touch with clients and the builder throughout the process to ensure everything is up-to-date and accurate.
The builder will ask for an initial deposit to get started during the building process. Additional deposits may be required at different stages of construction. The remaining down payment will need to be paid to the lawyer before you can take possession of the home. The final details of the mortgage are sorted out at the end of the process.
Progress Draw Mortgage
The second common type of builder mortgage is called a progress draw mortgage. With this mortgage, the builder can access funds from the lender during construction. When the home is about 30% complete, the builder will request a partial draw on the construction mortgage, which you'll need to sign for at the lawyer's office.
Most of the mortgage details are finalized when the first draw is taken. The term is selected, the full down payment is given to the lawyer, and the mortgage amount is set. The interest rate is locked in if you choose a fixed-rate mortgage term. As the builder continues construction, they can draw on the mortgage a second, third, or even fourth time. You'll make interest-only payments on the drawn funds during this period until the home is complete. Some builders may even reimburse you for the cost of the interest payments.
Each home builder has their own preference for the type of builder mortgage they want set up by a mortgage broker. Getting a pre-approval from a mortgage broker with experience in builder mortgages is very important before visiting showhomes. This will help you understand how these two common types of builder mortgages will work with your financial situation and keep you focused on homes within your price range.
So don't stress about the financial side of building your dream home. With the right knowledge and support, you can navigate builder mortgages and make your dream a reality.