Construction Mortgage: Financing and Getting a mortgage to build a house

Obtaining a construction mortgage or getting a mortgage to build a house is not as difficult as most people think, and it can be quite similar to obtaining a mortgage for a typical home purchase.

There are a few different options depending on the scenario that best fits your situations. Here are some of the different scenarios:

  • You will be purchasing a newly constructed home.
  • You will build your new home yourself.
  • You will be hiring a home builder to build your new home.

If you’re purchasing a quick-close or newly constructed home

Lots of home builders will build a variety of homes within each of the communities they are currently building. These homes may be already constructed or in the middle of being finished.

For this situation, the home builder is constructing the home with their own money and you will be required to make a 100% payment upon closing of the property.

In this case, a standard completion mortgage is all you will need, which is the same process as if you were buying any home.

If you will be acting as the contractor and building your own home

Lots of people have the capacity and expertise to act as their own contractor and hire sub-contractors in order to build their own home. If you fall into this group, then there are a couple options for financing.

1. If you have the funds required to pay your sub-contractor before the home is complete you can opt for a standard completion mortgage. In this scenario after the home is constructed, an appraisal will be conducted and based on the results an 80% – 90% mortgage may be taken.

2. If you need to make payments along the way, you will need a progress draw construction mortgage. For these mortgages, there are typically three installments paid out during construction, at 35%, 65%, and 100% completion. If you will need to purchase the land separately, you may need a land-draw or another loan type in order to purchase the land. Land cannot be insured through CMHC.

You would like a registered home builder to construct your new home

This is another very popular scenario in which you will work directly with a registered home builder or contractor to construct your home. Different builders have different policies but you will either need a completion mortgage or a progress draw construction mortgage in this case, the latter being used in most cases.

Understanding the types of construction mortgages

The two popular types of construction mortgages are the completion mortgage and the progress draw mortgage.

Completion Mortgage

This is a standard mortgage that gets paid out after the home is built. Once the construction is complete and you agree on a closing date or move-in day, the funds will be transferred or paid out just as they would in a home purchase.

This type of mortgage is used when purchase pre-constructed or quick-close homes or ones currently under construction by the builder.

Progress Draw Mortgage

The progress draw mortgage a construction mortgage that is not available in all areas, but it makes for a much easier process due to funds being released throughout the construction process.

With this mortgage, the bank or lending institution will release funds once the house reaches a certain level of completion. Most of the time this is when the house is 35%, 65% and 100% complete.

Connect with a local mortgage broker for more information on the best financing options available to build your new home.

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