Construction Mortgages: Things you need to know while building your home.
Buying your dream home can be one of the biggest decisions of your life. However, what makes the experience even better is when you decide to build your dream home. Nothing quite defines you more than your home built your way. You can decide its size, overall look and feel, and how much you are willing to invest in it. From the first slab to the last wall, you will have the liberty to design your home just the way you picture it. However, this does come with a lot of capital commitments and that’s where a construction mortgage can be a great option! So, let’s look into what a construction mortgage is, what do you need to consider for qualification reasons, and how your payment schedule could look like.
What are Construction Mortgages?
A construction mortgage allows you to draw down on the full amount of a mortgage at pre-determined stages of home construction. Construction Mortgages are advanced on a stage and completion basis. The amount that you intend to borrow is given to you in draws as you complete various levels of the project. If you already own a piece of land, the first advance is made available to you as equity take out. If you have not purchased land yet, the first advance is made available to you to purchase land. Only the interest amount on your borrowed capital is to be paid during the construction period. On completion of the construction, the entire loan amount can be refinanced into a normal mortgage.
Construction Mortgages can be used as a way to better ensure that most of your constructions cost are covered on time thus helping you prevent delays in the completing your home. However, it is possible that unforeseen expenses may arise which might increase the overall cost of the construction. Lenders do offer different options to make construction mortgages more attractive to borrowers. Some of these options include interest only payments during the construction phase, and a pre-determined locked in interest rate for your refinance once the construction begins. While applying for a construction mortgage, your debts, income and assets will be considered. You must also have a signed purchase or construction contract with the builder or construction company. This contract should include the layout plans, details such as the start and expected completion date, the overall contract amount which includes construction and if applicable the cost of the land.
As you can see in the table above, there are commonly 5 draws that the lender schedules.
The first draw of 15% of the total mortgage amount advanced is for the excavation of the new land you have purchased (if needed) and for the completion of the foundation. 15% of the project completion is required at this draw. The 2nd draw, at the 40% completion stage, is given to you when the roof of your building is on and the building is well protected, that is it is access secure, and airtight. At this stage of the draw, 25% of the mortgage amount would be advanced. At the 3rd draw, the construction must be almost 65% complete. This is when the plumbing and wiring has started, the plaster and dry wall is complete, the furnace is installed, and the external wall cladding is complete. Like the previous draw, 25% of the mortgage amount is advanced at this stage. At 85% of the project completion, 20% of the mortgage amount is advanced. This would be the stage when the kitchen cupboards are installed, bathrooms have been completed and the doors have been hung. The 5th and final draw of the remaining 15% will be at 100% completion of the project, when the house is ready for occupancy and seasonal and all exterior work has been completed. Prior to each draw being advanced, a property inspector will go to the property and ensure that the builder is following the New home Warranty policies and will ensure that each stage of the construction is completed with maximum accuracy. The cost of these inspections falls on the borrower. Some lenders deduct the appraisals and project inspection fees from each draw. An important thing to note is that once your mortgage is approved and signed, you might be able to change the mortgage amount to any upgrades or changes.
The entire process of the construction mortgage is long and there are many time sensitive decisions to make. You can always reach out to us for more questions!