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A home is usually the biggest purchase most Canadians will ever make. While some people are fine living in an older home, others want to live in a home 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 way to go when it comes to buying a brand-new home.
New Construction Financing
There are three categories of new construction financing: self-build home, builder/contractor (turn key), and buying from a builder (take out).
Type Of New Construction Mortgages
|Self-Build Home||– Progress Draw Mortgage|
– Completion Mortgage
|Turn-Key||– Progress Draw Mortgage|
– Completion Mortgage
|Take Out||– Completion Mortgage|
Progress Draw Mortgage
When it comes to a progress draw mortgage, you 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 actually reached the milestone, and you will get your funds once the lender has received confirmation.
Buyers who have progress draw mortgages must make payments on them as soon as the builder draws on them, meaning that they must often pay two mortgages at the same time: one for the home that’s being built and one for the home they’re currently living in.
Find out if you need extra home insurance when renovating your home.
With a completion mortgage, you require funds only when a home is fully built. 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
In a traditional mortgage, the borrower applies for financing, the lender grants their approval and gives the borrower a lump sum in order to pay for their house. On the other hand, 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. Unlike a traditional mortgage, those applying for a new construction mortgage receive their loans in stages. This allows them to pay for supplies as needed while also preventing the lender from losing all of their money if the project fails at start-up.
Other major differences between a new construction mortgage and a traditional mortgage are how long their terms are, how they are disbursed, and their down payments.
- 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, when it comes to a new construction mortgage the amount 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 like they do with a traditional mortgage.
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What Are Construction Draw Schedules?
Construction draw schedules are schedules of when construction draws are paid. 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, and the schedules put forth by these parties can be different because of varied construction timelines or costs. Not only can construction draw schedules be based on how much of the home is completed, but they can also be based on milestones, such as when the roof or interior are finished.
Example Of A Construction Draw Schedule
Below is an example of a construction draw schedule where the borrower does not already own the land that the home will be built on:
|Draw Number||Milestone||Draw Percentage of Total|
|First Draw||Purchased land||65% – 75% of land cost|
|Second Draw||Finished roof||45%|
|Third Draw||Finished drywall, plumbing, and wiring||70%|
|Fourth Draw||Finished interior||90%|
|Fifth Draw||Finished construction||100%|
Example Home Completion Schedule
Below is an example of a home completion schedule:
|Work Completed||Percentage of Total|
Pros And Cons Of A Progress Draw Mortgage
One of the big pros of a progress draw mortgage is that you can lock in your interest rate sooner, which offers you a bit more protection in a time of rising interest rates. Progress draw mortgages also protect all parties 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, and lenders don’t have to lend an amount of money that would be hard to get back if the buyer defaulted on the loan.
Paying For Two Mortgages
What can really get some people with 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 the mortgage of the home they’re currently living in (if they are currently paying off a mortgage). Paying for two mortgages at the same time can be difficult for some people, so they try to limit the time that they must make two payments as much as possible.
Pros And Cons Of A Completion Mortgage
The biggest pro that completion mortgages have over progress draw mortgages is that buyers aren’t stuck making two mortgage payments at the same time, sometimes for as much as a year. The downside to a completion mortgage, however, 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
One of the most important things to think about when getting a new construction mortgage is the New Home Warranty policies. Before releasing the funds from each draw, the lender will send out an inspector to make sure that the home builders are following these policies. Failure to follow these policies could result in you not getting the funds you need.
Another thing to know is that you, as the borrower, 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.
You should also know that 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 really depends on how much control you want over the home building process.
Self-build mortgages give you a lot of 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 the mortgage you already have. You will also have to wait longer to move into your house because you will have to work with the builders to make sure that 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, you are usually 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 since those decisions have already been made. If you want to move into a house quickly, buying from a builder might be the best bet.
Can You Get A Pre-Construction Mortgage For A Condo?
If you’re thinking about getting a pre-construction condo, you’ll have to consider numerous aspects before making the purchase.
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. You can expect your deposits to look like this:
- When submitting an offer to purchase, you’ll offer a certain amount as a deposit. Then provide;
- 5% in 30 days
- 5% in 90 days
- 5% in 180 days
- 5% at occupancy (when your unit is completed)
When purchasing a pre-construction condo, closing costs can be more expensive because it can include additional fees than a regular mortgage. These fees include:
- Assignment Fees – is a fee for when you sell before the final closing. Similalry if you flip the unit, you may be charged these fees as well.
- Development Charges – These fees are basically fees that the builder charges for the costs associated with developing property in the city.
- Occupancy Fees – When you move in before the rest of the building is completed. Sometimes, builder will let the lower floors move in while they continue contruction on the higher level floors.
Do I have to make monthly payments on construction loans?
Can I receive money to purchase land with a construction loan?
What happens to a construction loan when construction is complete?
How many construction draws can I receive?
Who is eligible for a new construction loan?
New construction mortgages are a great way to pay for a brand-new home. You can get a progress draw mortgage, where you get funds when your home’s construction reaches certain milestones, or a completion mortgage, where you get your funds once your home’s construction is complete. You can also consider a self-build mortgage, where you build a house from scratch or close to scratch. Or, a take-out mortgage, where you buy a home that is either complete or close to complete from a builder. The different kinds of mortgages give you a lot of flexibility because you can choose to move into a house quickly or get a lot of say in how the house is built.
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