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Mortgages can be a confusing topic for home buyers, especially when it comes to home builder mortgages. In this blog post, we will discuss what a home builder’s mortgage is, why you might need one, and how to get one. We will also provide some tips on how to make the process as smooth as possible. So if you are thinking about buying a new build, and want to know more about home builders’ mortgages, keep reading!
What is a Home Builder’s Mortgage?
A home builder’s mortgage is a type of loan that is specifically for people who are buying a newly built home. The loan is used to finance the construction of the home and can be used for both pre-construction and post-construction costs. Home builder’s mortgages are typically available from banks, credit unions, and other financial institutions.
Why Would I Need a Home Builder’s Mortgage In Canada?
There are a few reasons why you might need a home builder’s mortgage in Canada. Firstly, if you are buying a newly built home, the chances are that you will not have enough money saved up to pay for the construction costs outright. This is where a home builder’s mortgage comes in – it will help you to finance the construction of your new home.
Secondly, if you are buying a newly built home that is not yet completed, you may need a home builder’s mortgage to cover the cost of pre-construction expenses. These can include things like architects’ fees, engineers’ reports, and council approvals.
How Do I Get a Home Builder’s Mortgage?
The process of getting a home builder’s mortgage is similar to getting a regular mortgage. You will need to submit an application to a lender and provide them with information about your income, employment, and financial history. The lender will then assess your application and decide whether or not to approve you for the loan.
If you are approved, the loan will be disbursed in stages, as the construction of your home progresses. This is to ensure that the money is being used for its intended purpose and to protect the lender’s investment.
How is a Home Builder’s Mortgage Different from a Regular Mortgage?
There are a few key ways in which a home builder’s mortgage is different from a regular mortgage. Firstly, home builder’s mortgages are usually interest-only loans. This means that you will only be required to make payments on the interest of the loan while the construction is ongoing until the loan enters its repayment phase.
Also, a home builder’s mortgage is not advanced by the bank in one payment as with a resale home purchase. During the building process, the bank with advance set amounts upon completion of certain milestones (ie. foundation, framing, etc.)
What is the Typical Schedule of a Home Builder’s Loan?
As mentioned above, there is generally a standard schedule that the bank follows that determines the draws of the home builders or construction mortgage.
First Draw:
The first draw is released by the mortgage lender when the land has been excavated and the foundation of the home has been completed. This draw will account for roughly 15% of the home builder’s mortgage.
Second Draw:
The second draw is at the time the roof has been completed and weatherproofed. At this time the bank will generally release around an additional 25% of the construction mortgage.
Third Draw:
Once interior work such as electrical, plumbing, and drywall has commenced, another 25% of your construction mortgage will be advanced by your mortgage lender or financial institute.
Fourth Draw:
As your home is nearing completion, the bank will release another 15%. Your builder should be at the point that fixtures and cabinetry can be installed, as well as final touches being made at this stage.
Final Draw:
The last and final draw on your construction mortgage is given to your home builder when the house has been completed, and a final inspection has been conducted by the municipality. This last tranche should account for the remaining 20% of your mortgage.
What are Home Builder’s Mortgage Holdbacks?
Depending on the mortgage lender or financial institute, there may be something called a construction lien holdback. This is an amount of money that the bank will keep back from each construction draw, in order to protect their investment.
The lien holdback is generally around 10% of the total value of each construction draw and is released to the home builder once the work has been completed, and a final inspection has been conducted by the municipality.
“Construction mortgages and lien holdbacks can be confusing, but they don’t have to be. At Forever Homes, we’re dedicated to making the home building process as simple and stress-free as possible. Our team is here to answer all of your questions about construction mortgages and lien holdbacks. We’ll walk you through everything you need to know, from how to get started to what to expect at closing. So whether you’re a first-time homebuyer or a seasoned pro, we’re here to help you every step of the way.” – Richard Fung, a new home builder and owner of Forever Homes, based in London Ontario.
A home builder’s mortgage is a great option for those looking to build their dream home. The interest-only payments and staged disbursements make it easy to budget, and the lien holdback protects the lender’s investment. If you’re thinking of building your own home, be sure to talk to your bank about a home builder’s mortgage.
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