Financing the construction of a new home differs from that of buying and financing an existing home and can be a more complicated process. Whether you are building a new home for you and your family or you want to build an investment property you need to know that construction mortgages work much differently than a typical residential mortgage.
Approval for a construction mortgage is based on the appraised value of your lot and the cost of the construction which is typically confirmed by a contract from your builder. The approval process can also include the requirement of a contingency fund of 10 per cent of your construction costs over and above the down payment to handle any cost overruns to complete the construction. It is also typical for a lender to charge a fee for a construction mortgage.
The Construction Progress Draw Mortgage is a mortgage where the funds are advanced in stages as your home is being built. The full amount you are approved to borrow to complete your home is given to you in stages otherwise known as draws as you complete various levels of construction. If you do not own the land you are building on you will also have an initial land draw to help you purchase the land. The remaining draws are advanced to you typically at lock up, drywall and completion.
When you are ready to begin construction you will have to use your own funds to reach the first stage. These funds are typically your down payment however in some cases your down payment may not be sufficient thus the importance of the contingency fund. Upon completion of each stage of construction typically lock up, drywall and completion, the original appraiser will confirm construction has been completed to that specific stage. The lender will then release a portion of the mortgage funds to you. The lender must insure there are sufficient funds held back to bring the home to a completed basis. It is very typical with the first couple of draws that your builder will be requiring more money than the bank is releasing to you. This is where the contingency fund will again be very beneficial. As well builders understand the process and will carry you at a cost and this is an important item you should discuss with your builder to include in your contract.
During the construction phase you are required to make monthly interest only payments on the money advanced so keep in mind during the process you will be required to carry this payment in addition to your regular monthly obligations.
Of Prime Interest is a collaboration of Mortgage Professionals. Trish Balaberde 250-470-8324 Christine Hawkins 250-826-2001 Darwyn Sloat 250 718 4117.
