Mortgaging a New Home Build: How is it Different?
Whether you're buying a new home or choosing to build new, each option has an impact on how to determine which type of mortgage to get.
Mortgages for new construction homes are slightly different than mortgages for resale homes, and it can be difficult to find information about construction loans online. Banks don’t always market these types of loans because they tend to be riskier. After all, if you default on a mortgage for a home that’s only half-built, it will be hard for the bank to recoup their costs through foreclosure.
There are two primary types of mortgages for those who want to build their own homes. After you learn more about them and speak to a lender, you should be able to choose the type that’s right for your situation.
Completion Mortgages
Like the name implies, a completion mortgage is one that you take on at the completion of the home. It’s fairly easy to understand because it’s similar to more traditional types of mortgages. The bank pays for the home in a lump-sum payment, and you make monthly payments over the next 20 to 30 years.
Throughout the time that the home is being built, you can make changes to the mortgage. For instance, you might be able to include an upgrade you had forgotten about. The downside to this, though, is that any changes to your financial situation can cause your financing to fall through. Without the mortgage, you can’t get your house.
Builders don’t always like this type of mortgage because it means they’re taking on a lot of risk. They have to take care of all the material and labour costs associated with the build. If you can’t get the financing at the completion of the home, they might be stuck with a home that won’t sell. Consumers, however, prefer them because they tend to be easier to manage.
In general, banks put a limit on how long it can take for the home to be built if the buyer is getting a completion mortgage. It’s usually around 120 days or up to a year,depending on the financial institution.
Draw Mortgages
With a draw mortgage, you take out a loan for the home, and the builder can “draw” upon the mortgage at different periods throughout the build – at the initial ground-breaking phase, when the exterior is up and the home can be locked, when the drywall is up and the walls are ready to be painted, and at the completion of the home. Typically, this type of loan requires the borrower to have a significant down payment to cover the amount of the initial draw – as much as 25 to 35 percent of the total price of the home.
These types of mortgages are appealing because they spread out the risk. The bank has confidence in the buyer because they’re putting down such a hefty down payment. The builder knows that he will get the money he needs for supplies. The buyer knows that the builder must follow the schedule to comply with the rules. However, if you don’t have a lot of money saved up, you might be disappointed to find out you don’t have the buying power you thought you did.
Purchasing a Quick Possession Home
Quick possession homes are brand-new homes that the builder created on spec. Since they’re completed, you can take on a traditional mortgage. This is a good choice for those who want a new home but don’t like the new construction mortgage options.
When Are You Making Payments?
Completion mortgages are more like a gentlemen’s agreement until the home is finished. The bank does have to vet you and approve your mortgage application, but money doesn’t exchange hands until the end. That’s when you’ll start paying.
You have to start making payments on a draw mortgage right away. Paying this money in addition to rent or a current mortgage can be a hard burden for some buyers. It's important to determine what's affordable when applying for a mortgage before you commit to anything.
Making the Right Decision for Your Family
Each person has a unique situation and finding the right lender will also have an impact. A builder’s preferred lender will know about the new construction financing process and can help you determine which type of mortgage is right for your family. Sometimes, this means making some sacrifices to the customization to get a home that’s more affordable.
If you want to buy a new construction home, there’s a mortgage out there that will work for you. Consider all of your options before you make your final decision.
