How Does a Home Builders Mortgage Work?
A home builders mortgage, sometimes known as a “self-build” mortgage, is a loan used to finance the construction of your own home rather than mortgaging an existing home. Remember that, once you throw in the cost of building supplies and the builders and/or subcontractors you’ll likely engage, building a home from the ground up can sometimes end up being more expensive.
You can design the home and start building alone if you’re an experienced contractor, but you’ll almost certainly need to employ a team to assist you to finish it.
As a result, there are two alternative construction mortgages from which to pick in order to fund the construction of your home. Depending on your lender’s laws and the province or territory you live in, you can choose either a mortgage option or a combination of both.
The Progress Draw Mortgage
A “progress draw” mortgage is the initial financing option for home development projects. This is when the homeowner receives payments from their lender in installments during the course of the construction process until the project is completed or close to completion.
During each of these phases, the lender will send a home inspector to the property to inspect the progress of the construction and ensure that everything is on track. The inspector will submit a progress report to the lender after each visit, and the lender will release additional funds if needed.
If the inspector finds the construction to be substandard, the lender may be obliged to withdraw their funds.
The four phases of this type of mortgage are as follows:
- Phase 1 – The Foundation Draw: This draw is obtained when the plot of land is purchased and development of the home begins. However, the foundation draw will only be given if the land has little to no mortgage on it. If you’re still paying down your mortgage, you won’t get your first draw until around 30-50 percent of your house is finished. As a result, you’ll have to cover the price of finishing the first 30-50 percent of your home.
- Phase 2 – The Lock-Up Draw: When the home is around 30-50 percent finished, this will be received. This indicates that the foundation has been laid and that the windows and doors have been fitted so that the house can be “locked up” at the end of the day. If you’re still mortgaging the land you want to build on, this is the first draw you’ll get.
- Phase 3 – When the home is around 65-70 percent finished, with the heating system installed and the drywall ready to be painted, this draw will be issued.
- Phase 4 – The Completion Draw: When the house is either completely finished or very close to completion, this draw will be obtained. The house should have working power and plumbing, all licenses and contracts must be signed, and the house should be habitable.
Purchasing an empty lot to build on is a significant expenditure in and of itself, so keep that in mind when opting for the Progress Draw Mortgage. You’ll also have to pay a separate fee each time the inspector comes to inspect the construction progress.
The Completion Mortgage
When you get a “completion” mortgage, it usually implies you bought the house from a new home builder, and the construction is already completed, or at the very least ready for you to move in. The builder should not expect to be paid until you take possession of the home in this situation.
Some lenders will want a down payment because your mortgage will only be finalized 30 days before you legally take ownership of the home. Your lender should, however, allow you to pay it in installments, unlike a down payment for an existing home.
The completion mortgage should only be needed to pay off the remaining sum to the builder once the property is built, which should take roughly 4 months (most lenders who provide completion mortgages need the home to be completed within 120 days).
Many home purchasers choose completion mortgages since the conditions of the loan aren’t finalized until 30 days before the buyer takes possession of the property. This implies that before the 30-day period begins, home buyers are allowed to make certain changes to their mortgage, such as increasing it to cover any additional building costs.
However, before the completion mortgage is finished, the home buyer in question should not make any major changes to their life or credit, such as changing jobs, taking out another substantial loan, such as a vehicle loan, or doing anything else that goes against their lender’s requirements. If they do not follow the lender’s criteria, their mortgage may be cancelled.
Additional Things to Consider
First and foremost, before you try to secure either of these mortgage options and build your own home, you should be aware that these options are not available in every province and territory across Canada. For example, progress draw mortgages are not available from many lenders in Quebec and New Brunswick.
You should also do a lot of preparation before approaching any lender, such as having your construction designs and blueprints on hand, as well as a contract for the construction and associated fees. You’ll need a price for building materials and labor if you’re conducting a self-build.
You’ll need to produce a copy of the deed and proof of sale for the lot you’re buying, as well as authorization from the municipality to build there.
Keeping track of both the build’s development and the money you’re putting into it is crucial. Prepare financially for any unforeseen events that may force the construction to be delayed, as well as any additional expenses or repairs that may be required.
Assume that anything may go wrong when building your own home from the ground up, so have a backup plan in place, even if it means tapping into your resources. In fact, it’s recommended that you set aside at least 15% of the overall cost of the home just in case something goes wrong and the project is jeopardized.
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