Need a Construction Loan or Construction Mortgage?
Qualified Builder Completion and Self-Builder Draw Mortgages
A lot of time and thought goes into building a new home; from layout to finishes, the process can be quite overwhelming. For many people who choose to build their home, the details of their construction loan or construction mortgage is often overlooked.
There are two approaches to building a new home and the requirements for each can be a bit different. It is important to understand the difference before deciding which type of build is right for you.
1. Qualified Builder Home – Completion Construction Mortgage
If you are purchasing a home from a qualified builder for a fixed price upon completion of the build, you will be looking to apply for a completion construction mortgage. Completion construction mortgages can be arranged in a very similar way to arranging a mortgage for an existing home purchase. Since financing is only arranged once the home is completed, there is no more risk for the lender with this type of construction loan than a resale property.
Features of a completion construction mortgage:
- Builder owns the lot where the home is to be built.
- Money is required only when the home is 100% complete – similar to an existing home purchase.
- The lender may require an appraisal before, during, or after the build to ensure the home is worth the amount being mortgaged.
- A down payment is still needed, but can often be paid in a series of instalments.
- Mortgage agent will not require an administration fee to arrange this type of financing since this type of construction mortgage is much the same as a typical resale property mortgage.
Documents required for qualified builder completion construction mortgage:
- Signed and accepted copy of building contract.
- One complete set of house plans and working drawings / blue prints.
- Site Plan showing legal description, dimensions of property in detail.
- Confirmation Builder is a “New Home Warranty” builder.
- An Appraisal indicating post-construction final value of the home.
Approval process for a completion construction mortgage is also the same as it would for financing an existing home. The appraised value will be the sum of the value of the home and the value of the land. Since access to mortgaged amount will not be available until the home build is complete, it is important to ensure you have any required funds which must be paid before the build is complete. Down payment and other miscellaneous expenses may be necessary during the construction process, so having adequate funds available is important.
2. Self Builder Home – Progress Draw Construction Loan
Progress draw construction loans are used if you plan to build a home as your own general contractor, or have purchased the land and have hired a qualified builder to construct a home on it for you. This would mean that you are hiring sub-contractors or hiring one builder to sub-contract the entire project for you on your land.
Progress Draw – Two Separate Construction Loans
With a progress draw construction loan, the mortgage agent must set up two separate loans; a short term construction loan to fund the build, then a construction mortgage once the build is complete. The final construction mortgage is typically arranged 30-45 days before the completion of the construction and will pay off the progress draw loan in full.
You can apply here for a progress draw construction loan on-line if this type of financing fits your needs, or contact us if you need some more guidance!
Features of a progress draw construction loan:
- Buyer usually owns or purchases the land on which the home will be built.
- Usually three draws of funds at the 35-40%, 65-70% and 100% completion stages.
- Completion is verified at each stage by a progress report from an appraiser.
- A down payment is still needed upfront, but can often be paid in a series of instalments.
- Interest rates are significantly higher than a traditional mortgage since the term is usually for only about 6 months. Prime + 2-4% is common.
- Mortgage agents do not receive a commission on this type of financing and usually charge an administration fee due to the added time and effort that must be committed to a progress draw construction loan.
Documents required for a self builder draw construction loan financing:
- Copy of Land Contract if land is being purchased or copy of Title of land already owned
- Resume confirming good knowledge of the home building process.
- One Complete set of house plans and working drawings / blueprint.
- Site Plan showing legal description, dimensions of property in detail.
- Copy of all Sub-Contracts which confirm Home Construction Costs.
- An Appraisal indicating post-construction final value of the home.
Approval process for a self builder draw construction loan is the same as it would for financing an existing home. The appraised value will be the sum of the value of the home and the value of the land.
Other Construction Build Financing Scenarios Exist
While the qualified builder and self builder scenarios are most common, you may have agreed to different terms with your builder. Regardless, it is always important to contact a mortgage consultant while decisions made before and during the construction process of your home.
Kyle Pearce
Home Mortgage Ontario Agent, M12000636
Phone 519-818-0078
Fax 519-966-6702
Email [email protected]
Office 2985 Dougall Avenue, Windsor, Ontario N9E 1S1
Contact Us and expect a response within 24-hours!
Located in Windsor, Ontario, we specialize in home mortgages of all types in Essex County and across Ontario.
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The Mortgage Centre has decades of experience providing Canadians with mortgage financing through a team of nationwide independent Mortgage Centre offices. Because we’re local business professionals with roots in our communities, we are dedicated to helping our clients make well informed financing decisions.
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