Finding a home that meets all your criteria can be challenging, often requiring compromises between your must-haves and bonus features. However, if you dream of a custom-designed home that includes every detail on your wishlist, getting a construction mortgage and building from scratch could be the ideal solution. With the help of a construction mortgage, you can bring your vision to life and ensure your new home includes everything you desire.
A construction mortgage is a specialized loan designed to finance the building of a new home. Unlike a traditional mortgage, which provides a lump sum for purchasing an existing property, a construction mortgage disburses funds in stages as construction progresses. There are two main types:
1. Completion Mortgage: Funds are released once the home is fully built, similar to a conventional mortgage but typically with a different down payment structure. This is commonly used when purchasing from a new home builder.
2. Progress-Draw Mortgage: Funds are distributed in phases based on construction milestones, such as completing the foundation or installing drywall. This type of mortgage requires detailed planning and regular inspections to release each draw.
With a construction mortgage, you’ll receive funds at various stages of construction. For example, the first draw might cover excavation and foundation work, while subsequent draws fund the framing, interior work, and final touches. Generally, lenders finance up to 80% of the total construction cost, with the remaining amount covered by the borrower. Usually the lender also requires the borrow to have extra funds on hand in case of cost overruns.
Key Differences from Conventional Mortgages:
– Funding: Construction mortgages release funds in stages, while conventional mortgages provide a lump sum.
– Interest Rates: Construction mortgages often have higher interest rates during construction and then revery to normal mortgage rates once the structure is complete.
– Down Payment: Typically requires a down payment of 20% or more, compared to as little as 5% for conventional mortgages.
– Term and Amortization: Construction mortgages are short-term (up to 1 year) and then can be locked in for longer terms once the structure is complete.
Pros:
– Customization: Build a home tailored to your exact specifications.
– Interest Payments: Pay interest only during the construction phase.
– Land Purchase: Use the first draw to purchase land if needed.
Cons:
– Higher Costs: Generally comes with higher interest rates and additional inspection fees.
– Complexity: Involves detailed planning, inspections, and potential delays.
To secure a construction mortgage, you’ll need a strong financial profile, including a good credit score and proof of income. Lenders will also require comprehensive project details such as builder credentials, blueprints, and budgets. Working with Your Mortgage Source can help you navigate the complexities of the application process.
While building a home with a construction mortgage requires careful planning and can involve higher costs, it offers the opportunity to create a home that perfectly suits your needs and preferences. If you’re ready to invest in a custom-built home, a construction mortgage can help.
If you need more information regarding mortgages or if you need any advice on your personal situation please contact our office at 604-556-3893 or email at alex.kotai@ymscanada.ca.
For more information on our mortgage products and your preferred Abbotsford Mortgage Broker please visit our website at www.ymscanada.ca.
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