There is a lot involved in building a new home. So much so, that the entire process can become overwhelming for those who choose to build instead of buy a home that’s already built. Since building a home can take up a lot of time and focus, it’s not uncommon for the details of your construction loan or mortgage to be an afterthought. It’s likely that lenders will also request more information and money up front. If you are planning on building a new home, you need to understand the approach and requirements before you decide on your type of build.
#1: Completion Construction Mortgage
When you’re purchasing a home from a qualified builder at a fixed price upon completion, you’ll need to apply for a completion construction mortgage. These types of mortgages are quite similar to securing a mortgages for a home that’s already built. However, with this construction loan your level of risk reduces in the eyes of lenders due to the fact that financing is only arranges upon completion of the build.
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The Builder will own the lot where the home will be built
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You require no money until the home is 100 percent complete
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More than one appraisal may be required, one before the build, one during and one upon completion. These are required so that your lender can ensure the home is worth the amount of your construction mortgage loan
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Your down payment can be paid in installments in most cases
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You will not have to pay an administration fee to your mortgage agent to arrange your construction loan since it works the same as a resale property loan
Your appraisal value will be the combined value of both your home and the land. However, you should ensure that you have funds to pay any costs that are due before the completion of the build, since you won’t have access to your mortgage loan until your home is built. This could include money for your down payments and other various expenses that occur during construction.
#2: Progress Draw
Now, if you’re a general contractor who’s planning on building your own home, or you’ve hired a builder to construct your home for you on the land you’ve purchase than you’d go with a progress draw construction loan. This type of loan is different from a completion construction loan in the sense that you’d essentially own the land and you’d be hiring a subcontractor or builder to build your home on your own land, as opposed to building on land your builder owns.
When it comes to your mortgage, your broker will need to set this up as two separate loans:
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A short-term construction loan (to pay for the build)
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A construction mortgage (once build is complete)
Your construction mortgage is usually arranged between 30 and 45 day before the build is complete and it will also pay your progress draw construction loan in full. Here are the benefits of a progress draw loan:
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As the buyer you will buy and own the land where your home will be built
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This loan consists of three draw stages of funds (35-40 percent, 65-70 percent and 100 percent completion)
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An appraiser will provide a progress report upon the completion of each stage
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Your down payment can be paid in instalments
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You do not have to pay commission to your mortgage broker for progress draw financing
The approval process for a self builder progress construction loan is similar to a completion construction loan mortgage and the appraised value is also calculated the same.
If you and your builder have already agreed to some terms, it’s a good idea to speak to a mortgage professional before you make any final decisions about the construction of your home.
How to Obtain a Construction Loan or Mortgage?
Before you dive into the initial planning phase of your custom home build, speak to your broker or lender about your financing options. In doing so, you can get pre-qualified and pre-approval and begin to understand what budget you will have and if it’s realistic. If you’ve already purchased land, you can use it as equity. This will work in your favor.
Here are the next steps…
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Finalize your home building plans
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Work out a timeframe
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Collect cost estimate from your builder
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Approach your lender and apply for your completion construction or progress draw loan
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Submit your required documentation to your lender to have it verified
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Upon mortgage loan approval, begin building
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For construction loans, obtain a certificate of occupancy, sign confirmation from your builder stating they’ve been paid in full and have a final appraisal completed
Remember, you should secure a loan with only one closing cost (i.e. construction-to-permanent loan). Even though financing the construction of a new home can be quite intensive, you should be prepared and gain knowledge ahead of time about the entire process. This will help you to ensure you’re in the best possible position to make the most informed decisions.
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