If you’re in the market to buy a home, you have lots to consider, including whether to buy an existing home or a newly constructed one that’s never been lived in before. While a traditional mortgage is one way to go about purchasing a home, a new construction mortgage is arguably the best option when it comes to buying a brand-new home.
Key Points
- A new construction mortgage is designed to provide financing to pay for a newly built home.
- Funding can either be provided in one lump sum when construction is completed or incrementally as various phases of construction are completed.
- Down payment amounts on new construction mortgages are usually higher than they are for standard mortgages.
What Is A New Construction Mortgage?
A new construction mortgage is a type of loan that provides financing for the construction of a new home. The funds can either be provided in one lump sum when construction is complete (completion mortgage) or in increments during the construction phase (progress draw mortgage).
Progress Draw Mortgage
With a progress draw mortgage, you’ll receive funds at various phases throughout the construction of your home. In other words, you’ll get funds when certain milestones are hit during construction.
For example, you may get some of your funds at 35% completion, 65% completion, and 100% completion. At each milestone, your lender will send an inspector to confirm that the builders have reached the milestone, and you will get your funds once the lender has received confirmation.
Ideally, the construction of the home should be completed within 15 months of the first advance.
| Note: Buyers who have progress draw mortgages must make payments on them as soon as the builder draws on them. That means they might have to pay two mortgages or payments at the same time: one for the home that’s being built and one for your current living arrangements (whether that’s rent or another mortgage). |
Completion Mortgage
With a completion mortgage, you require funds only when a home is fully built. So, the builder will not receive any funds until you take possession of the home.
When you submit an offer to purchase a home using a completion mortgage, you must make a down payment, which can often be paid in several installments. When the home is built, you will use the funds from the mortgage to pay the builder the balance of what they are owed.
For example, if a home costs $500,000, the payment schedule might look like this:
- $10,000 when submitting an offer to purchase
- $10,000 in 30 days
- $10,000 in 60 days
- $10,000 in 90 days
- $460,000 due when the house is fully built
Differences Between A New Construction Mortgage and A Traditional Mortgage
There are several differences between a traditional mortgage and a construction mortgage:
- Who the loan is for: A traditional mortgage is designed for borrowers who need a lump sum of money to pay for a home purchase. A new construction mortgage is specifically catered to those who want to build their own homes. It’s designed in a way that helps a person finance the building process while protecting the lender – usually a bank – at the same time. These mortgages can also do rate holds for long periods of time.
- Term: While traditional mortgages are fairly long-term, commonly lasting decades, new construction mortgages are very short-term. They often last one year or less.
- Disbursements: While you get the full amount of your home’s value to purchase a home with a traditional mortgage, a new construction mortgage is given at different stages of the construction process.
- Down payment: The down payment on a new construction mortgage is often higher than it is on a traditional mortgage because the lender does not have your home as collateral, as they do with a traditional mortgage.
What Are Construction Draw Schedules?
Construction draw schedules determine when specific phases of construction are complete, and when funds will be subsequently released to keep the job going.
Before construction begins, these schedules are negotiated and agreed upon. The schedules can be put forth by the lender, the lender’s appraiser, or the builder, each of which may differ because of varied construction timelines or costs.
Example Of A Construction Draw Schedule
Below is an example of a construction draw schedule where the borrower already owns the land that the home will be built on:
| Draw Number | Milestone | Draw Percentage of Total |
| First Draw | Foundation | 15% |
| Second Draw | Finished roof | 45% |
| Third Draw | Finished drywall, plumbing, and wiring | 70% |
| Fourth Draw | Finished interior | 90% |
| Fifth Draw | Finished construction | 100% |
Keep in mind that some of these milestones and timelines may vary depending on the lender.
Example Home Completion Schedule
Below is an example of a home completion schedule:
| Work Completed | Percentage of Total |
| Excavation | 10% |
| Foundation | 15% |
| Framing | 25% |
| Roofing | 25% |
| Windows | 10% |
| HVAC | 5% |
| Drywall | 5% |
| Painting | 5% |
| Total | 100% |
Pros And Cons Of A Progress Draw Mortgage
Progress draw mortgages come with a handful of perks and drawbacks:
Pros:
- Lock in your rate sooner. One of the biggest advantages of a progress draw mortgage is that you can lock in your interest rate sooner. This offers you a bit more protection in a time of rising interest rates.
- Protection for all parties. Progress draw mortgages also protect everyone involved:
- Buyers don’t have to make a full mortgage payment on a house they cannot live in
- Builders don’t have to use their own money to pay for supplies upfront
- Lenders don’t have to lend an amount of money that would be hard to get back if the buyer defaulted on the loan or if the builder did not complete the project.
Cons:
- Paying for two mortgages. A major deterrent of a progress draw mortgage is the second mortgage payment. People with these mortgages must make payments on them as soon as the builder draws on them in addition to their rent or mortgage of the home they’re currently living in. Paying for two mortgages at the same time can be difficult, so they try to limit the time that they must make two payments as much as possible.
- Schedule differences between lenders and builders. Sometimes, the builder and the lender may have different schedules. Lenders may not provide funding until a certain stage is completed.
- Appraiser fees. Construction loans can be more expensive because at each stage, an appraiser has to go out and verify completion.
Pros And Cons Of A Completion Mortgage
A completion mortgage has a couple of advantages and disadvantages worth considering:
Pros:
- Only one mortgage. The biggest pro that completion mortgages have over progress draw mortgages is that buyers aren’t stuck making two payments for their living arrangements. Whether you’re currently renting or paying a mortgage, you won’t have to make payments for that and your new mortgage at the same time.
Cons:
- Available for homes with quick closing. The downside to a completion mortgage is that they’re often only available on quick-possession homes. These homes are either already built or almost built, so buyers get less control over how the home looks.
Things You Should Know When Getting A New Construction Mortgage
There are a few key factors to understand before applying for a new construction mortgage:
- Warranty policies. One of the most important things when getting a new construction mortgage is the New Home Warranty policies. Before releasing the funds from each draw, the lender will send an inspector to ensure the builders follow these policies. Failure to follow these policies could result in you not getting the funds you need.
- Inspection costs. As the borrower, you are responsible for inspection costs. Generally, you will have to pay these out of your pocket, although some lenders will let you deduct appraisal and progress inspection fees from your draws.
- No changes. No accommodations for any changes or upgrades made to your home can be made by changing the amount of your mortgage once it is signed and approved.
Should You Get A Self-Build Mortgage Or Buy From A Builder?
Whether you should get a self-build mortgage or buy from a builder depends on how much control you want over the home-building process.
Self-Build Mortgage
Self-build mortgages give you freedom over how your house looks because construction either hasn’t yet started or is in the early stages. The big downside is that you will have to make payments on the self-build mortgage and on your current living arrangements at the same time.
You will also have to wait longer to move into your house because you’ll need to work with the builders to ensure the house is built to your specifications. If you want a lot of freedom on how your house looks, a self-build mortgage might be for you.
Buying From A Builder
When you buy a home from a builder, typically you’re buying a house that is either close to completion or already complete. A house with an advanced state of completion means that you don’t have a lot of decisions left to make on how the house looks. If you want to move quickly, buying from a builder might be the best bet.
Can You Get A Pre-Construction Mortgage For A Condo?
If you’re buying a pre-construction condo, you’ll have to consider numerous aspects before making the purchase.
Down Payment
While resale condos require as little as 5% down, pre-construction condos usually require 20% as a down payment. However, you won’t be expected to pay the 20% in one shot, it’ll be spread out over a period of time like the completion mortgage, mentioned above.
When submitting an offer to purchase, you’ll offer a certain amount as a deposit. Then, you can expect your subsequent deposits to look something like this:
- 5% in 30 days
- 5% in 90 days
- 5% in 180 days
- 5% at occupancy (when your unit is completed)
Closing Costs
When purchasing a pre-construction condo, closing costs can be more expensive as they can include additional fees than a regular mortgage. These fees include:
- Assignment Fees – This fee is for when you sell before the final closing. Similarly, if you flip the unit, you may also be charged these fees.
- Development Charges – These fees are charged by the builder for the costs associated with developing property in the city.
- Occupancy Fees – These fees apply if you move in before the rest of the building is completed. Sometimes, the builder will let residents of lower floors move in while they continue construction on the higher-level floors.
Bottom Line
New construction mortgages are a great way to pay for a brand-new home. You can choose between a progress draw or a completion mortgage. Depending on how or when you need the funds throughout construction. You can also consider a self-build or take-out mortgage, depending on whether you’re building a house from scratch or are buying a new almost complete home. The different options give you a lot of flexibility because you can choose to move into a house quickly or have more say in how the house is built.
