Building your own home can be one of the most satisfying experiences a homebuyer can undertake, or, it can end up being the most aggravating. The key to a successful build is understanding all the steps involved, and following through with the many details it encompasses. This includes not only the construction process, but a firm understanding of the financing options available to you.
There are several types of new construction financing available to you as a home-builder – you have the ability to hire a contractor to construct your home, you may build it yourself, or you may purchase a newly constructed home and each will ultimately affect your financing.
Should you choose to hire a contractor you will require a builder or contractor mortgage (aka turn-key), where you as a customer have entered into an agreement with the registered builder to have them construct your home. In this event you would require a completion mortgage or a progress draw mortgage.
Should you decide as a home-owner to construct your own home, the same financing applies – you will require a completion mortgage or progress draw mortgage.
On the other hand, should you purchase a newly constructed home you will only require a completion mortgage as you are not taking possession of the property until it is 100% complete.
What is a completion mortgage?
A completion mortgage occurs when you have purchased your home through a builder and take possession once the property is 100% complete – in other words, you don’t require financing until the home is 100% constructed. The customer would have to make a down payment, which is typically provided to the builder, in phases, for example:
You purchase a home for $400,000.00, your down payment may be due as follows:
1. 5000.00 at time of purchase
2. 5000.00 in 30 days
3. 5000.00 in 60 days
4. 5000.00 in 90 days
5. The balance remaining due on possession (which consequently takes the form of your completion mortgage)
What is a progress draw mortgage?
A progress draw mortgage differs from a completion mortgage in that portions of your mortgage are funded to you at specific times during the construction process. A lender typically accounts for 3-4 advances in total; at roofing, lock-up, and completion. It is important to note that when employing a progress draw mortgage you will require the assistance of a solicitor as they are the ones who advance the funds to the builder.
Before the solicitor is able to release funds to the builder, you will have to undergo Progress Inspection Reports, which detail the percentage complete prior to the advancement of these funds.
Also note that you begin paying interest on the funds advanced at the time of advancement. Your final advance (completion stage) is made when the home is between 97% and 100% complete.
What documentation is typically required for financing?
1. Written employment/income verification
2. Proof of down payment
3. Copies of all quotes for construction (if self-building)
4. Signed Contact between yourself and the builder
5. Full appraisal for the completed value of the home
6. Plans/House Specifications
7. If constructing a condo you will need projected condo budgets and financials
8. Solicitor Information
9. Other documentation may be required as applicable
Is constructing a new home right for you? Contact one of our Calgary and Southern Alberta Mortgage Specialists at 1.866.955.9662 and they will work with you to determine whether a new build is best suited for you, and will work with you to determine your financing requirements.
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