Something I do as a Hamilton mortgage broker is to help buyers find financing for construction mortgages. These are for homes that are not yet built or in the process of being built. The mortgage covers the expense of the construction of the home, and they are a bit different than your traditional mortgage loans. There are two options that you have with a construction mortgage; a completion mortgage and a progress draw mortgage.
With a completion mortgage, your mortgage isn’t finalized until the home’s construction is complete typically built by one of the larger builders. You typically will need to make scheduled deposits base on construction time frames with a pre-set schedule. With a completion mortgage, you typically have 30 days before you take possession of the home to make any changes to the mortgage package. This would include increasing the loan amount so that you have money for additions or upgrades in the new home.
A completion mortgage gives that security of knowing that, until you have a physical home to move into, you won’t need to start paying the mortgage. The downside is that anything can change between the start of construction and moving in, for example changing jobs or changes in your financial situation that could jeopardize the loan being approved.
A progress-draw or draw mortgage is an option available to utilize smaller custom builders to build your dream home exactly the way you want it. The construction mortgage provides the builder draw money during the period of construction in increments. Payments are made at the start of construction when the home is 35 to 40% complete when it is 65 to 70% complete, and then upon 100% completion. This type of line can also be used if you are building the home yourself. When doing a builder mortgage you are always not eligible for draws until after a portion of the home is completed therefore it is extremely important to have sufficient resources to cover your costs between draws. This is typically done first by owing the land outright and then either having sufficient cash on hand or access to a line of credit.
The benefit with this type of construction mortgage is that the builder won’t need to cover the costs of construction upfront. Inspections are required throughout the process to ensure everything is being done correctly and on time. If the work doesn’t pass inspection, the builder won’t be paid the next installment until it does. This helps keep the construction process on track, however, you will need to pay a fee for each inspection. You can also start being charged interest from the time of the first installment paid and, once that first payment is made, you won’t be able to make any changes to the mortgage.
The Mortgage Process
Going through the mortgage process for a construction loan is a bit more complex than your traditional loan. You may need things like a construction cost estimate and some lenders won’t approve a mortgage a build that goes past their specified date of completion. In some cases, you may find you are restricted in your choice for a builder.
There are a lot of things that need to be considered when going for a construction mortgage, so it’s important that the mortgage lender you choose specialized in this type of mortgage. If you’re planning on having your home built and need advice on construction mortgages, call one of our Hamilton mortgage brokers today!