Building a new home comes with a big to-do list. On top of this list is arranging proper financing. Here are the steps you need to take and some common Q&A to help you understand how a builder mortgage works.
It starts with a mortgage pre-approval
Our digitalized experience allows you to complete a pre-approval in the comfort of your home at any time. The first step when building a home is to get a mortgage pre-approval from an experienced mortgage broker.
Here’s why
By getting a mortgage pre-approval, you’ll have a better idea of how much you can borrow, what your monthly mortgage payments will be and the mortgage options available to build a home.
Find out how much you can afford before you start planning
A mortgage pre-approval will keep you focused on your budget, knowing the maximum mortgage amount you can afford.
Writing up the purchase agreement
The builder will take you through the steps to finalize the purchase agreement. They will include the condition “subject to financing,” which gives the mortgage advisor time to finalize your mortgage. We recommend two weeks to meet this condition.
Do you have a home to sell?
If you have a home to sell, options will be presented to you. If you do not qualify to keep your existing home, the condition “subject to the sale of existing home” will also be included on the purchase agreement and the mortgage approval. This could delay the build start.
Can I stay in my current house while I build my new one?
Every homeowner will have a different scenario when building a home. Mortgage brokers can strategize and restructure your finances to come up with the deposits required by the builder to start the build. For peace of mind and to ensure you have enough cash to work with, many people opt to sell before beginning construction on a new home. They rent or move in with family for a short time.
Finalizing the mortgage approval
This is an important part of the process, and we don’t have a lot of time to waste. During the two-week condition period, we must send all the required documents to the lender. This includes income confirmation, details on current debts, down payment confirmation and the builder contract details. The lender needs time to review your mortgage application to issue a mortgage approval. Once approved, you can remove your financing condition.
Construction Draw Mortgage
This type of mortgage is set up to allow the builder to use the lender’s money during the building process. When the home is between 16% – 48% complete, the builder will ask for the mortgage to be partially drawn on – first draw. When the builder constructs the home further, they will draw on the mortgage a second, third and up to a fourth time.
First draw
Approximately 1-2 months before the first draw, you will sign the mortgage documents with your lawyer. Details of the mortgage are finalized when the first draw is taken. The term is set, the full down payment may be required, and the mortgage amount will be finalized. The interest rate is locked in (if you choose a fixed rate mortgage term) or the discount from prime is locked on a variable rate mortgage. No further changes can be made to the mortgage.
What is the draw process?
This mortgage allows the builder to draw down on the full amount of the mortgage at predetermined stages of the home construction. Prior to each draw being advanced, an inspector will go to the property to ensure the builder is following the NHW (New Home Warranty) policies and to ensure each stage is completed with accuracy before releasing funds to the lawyer.
Can I change the details of the mortgage after the first draw?
After your mortgage is approved and signed, you cannot change your mortgage amount to accommodate any upgrades made to the home. If you’re planning to sell a home and pay down your mortgage once everything is finalized, please ask how you can accomplish this goal.
Construction Completion Mortgage
This type of builder mortgage ensures that your mortgage’s terms and conditions will not expire while the home is being built.
It is required when a builder constructs a home from start to finish using their own funds. Because the building process can take anywhere from six months to two years, the bank will guarantee a rate for the entire build time. This can be risky for banks because interest rates can rise during this time. To offset the risk, the interest rates that are offered are higher than the typical 120-day rate holds. The good news is that the rate will not go up if rates were to rise.
What if rates go down?
We review completion mortgages 90 days before the possession date. If rates are lower than the construction completion mortgage rate, and the client still qualifies for the mortgage, I can lower the rate. This added service allows clients to feel confident knowing they will always get the best deal. Your mortgage details are finalized at the very end of the process.
Upgrades
Any changes that need to be made, such as increasing the mortgage amount to include upgrades, must be addressed ASAP before instructions are sent to the lawyer’s office.
Including upgrades
If any additional upgrades are made to the home, they are not automatically included in the mortgage approval, and you will be expected to pay them out of pocket. If you want to add upgrades to your mortgage, this may result in a new mortgage approval. Please contact me before committing to upgrades that need to be included in your mortgage.
What type of builder mortgage does my builder require to build a house?
Builders have a preference of the kind of construction mortgage they need set up by a mortgage broker. Most custom builders prefer a draw mortgage. Larger companies may require a draw mortgage or a completion mortgage.
How long is my interest rate held for?
With the lenders we work with, our interest rate is held for 6 months on a construction draw mortgage. Once the first draw is taken, the interest rate is locked in for the duration of the build and for the term chosen. This gives the builder time to get the home to the first stage without worrying about rates increasing. For a completion mortgage, a rate can be held up to 18 months. The rate hold length is chosen based on the builder’s advice.
Let us help you understand the special terms and considerations for a builder mortgage. We can help you decide which option best suits your needs. Building a home is a complex process; your mortgage shouldn’t be.