You have made the big decision to build instead of buying an existing home and now you need to determine your financing hurdles and options. You have come to the right place. Axis Mortgage Accredited Mortgage Professionals are experienced in the difficult world of construction financing. There are many differences between qualifying for an existing home vs. building a new one. Most builds fall into one of two categories, with there being differences within those categories depending on down payment, timing of possession, if you are selling an existing home, if the land is included in the purchase, etc.
The two categories that determine the lending guidelines you will be governed by are 1) Building a home through a homebuilder or general contractor; 2) Building your home on your own or where you act as the general contractor.
Building a Home with a Contractor
There are many reasons to build your new home with a homebuilder or contractor. Most homebuilders have access to developed lots (as opposed to you having to source out your own land) and sub trades that will ultimately take your home to completion in a more timely fashion. Homebuilders and contractors also have vast knowledge of the process and may be able to provide you with the architect, home decorator, etc. to help assure you end up with the home of your dreams. It is recommended to ask many questions of your homebuilder to ensure you are working with some one that will achieve your goals, and ALWAYS ask for, and check out references of the builder. Not all homebuilders are created equally so do your homework.
One of the major factors in qualifying you for your new mortgage is if the home has new home warranty coverage. Home warranty provided by a National or Provincial organization is what the lenders are looking for. Questioning the homebuilder or contractor about their new home warranty coverage is a must. If they are not new home warranty members you may face problems with the financing, and be required to purchase new home warranty on a one off. These one off warranty packages can be in the $4000 to $5000 range.
There are two general mortgage types required when building with a homebuilder. In some cases your homebuilder is in a position to carry the financing to completion. This is the best-case scenario for you, as the builder will have already purchased the land and will carry the cost of the build until the home is complete and you take possession. You will be required to confirm prior to the build starting that your financing is secure however you will not be required to advance any mortgage money until completion. Often in this situation the homebuilder will only require a small deposit to get started. This deposit will be counted towards your overall down payment.
In other cases your homebuilder will require a progress draw mortgage. Draw mortgages are advanced in stages as the home nears completion. Most lenders follow these guidelines for advancing on the home:
15% complete. The land is purchased, the excavating is done and the basement is poured. At this stage the excavated land is ready to be pushed back into place (backfill). This triggers the first stage the lender is willing to advance.
45-50% complete. This stage is often considered “lock up”. At this stage the home is framed, the mechanical is in, and windows, doors and roofing are in place. This allows the home to be locked with no outside access available.
65% complete. At this stage the electrical and rough plumbing are complete. The home will also be drywalled and ready for paint.
85% complete. The home is painted and the cabinetry, light fixtures and some finish work are completed.
100% complete. The home is now finished and your possession date will trigger your mortgage being converted from a draw mortgage to your final mortgage product.
Under some circumstances a builder may require an advance on the land in order to pay the developer before they begin to build. This is an option with some lenders on a case-by-case situation. In all situations where money is advanced on the land there will be smaller advances on the other stages of the build. In most cases there is a maximum of four draws to the builder, with a fifth being a possibility based on the situation. And in all cases the lender will charge you interest on the money advanced up to that point. Building with a homebuilder requires a large amount of communication between all parties. It is vitally important to work with a mortgage planner and lender that understand the intricacies of construction financing.
Building a home your self is recommended only for those who have the knowledge of the process and are surrounded by competent sub trades. It is a lengthy, stressful process, but it certainly comes with rewards. Your sense of self-accomplishment is tremendous, and the amount of money you can save is also very great. Depending on the market you are in you may save up to 20-25% of the normal cost to build.
Self-build construction financing is provided by only a handful of lenders. The risk factor for lenders is much greater than if there was a builder involved and there-for most of them do not partake in this type of financing. The above types of mortgages are also available for self-builders, however it is almost a certainty that self-builders can’t carry the home to completion. Draw mortgages are a necessity for most.
As the home is complete to certain stages (see above) the money can be advanced to the self-builder, who will be responsible for paying the sub trades. You will need to have a good understanding with your sub trades that they will not get paid until the home gets to a certain stage. This means that some of the sub trades may have to wait 30-60 days for payment. It is recommended that you have a substantial amount of money or accessible credit to cover the short falls and time delays for your sub trades. If you are a current homeowner we can help you access the equity in your home to cover build costs. Ask us about setting up an operating line of credit or open mortgage.
New home warranty? When you work with a home-builder it is a must. When you build a home on your own it is not always required. Ask your mortgage planner for details on home warranty requirements from your lender.
Land loan. In many cases of self-building you are required to buy the land up front before you can begin the build process. We can assist you with a land loan or by accessing equity in an existing property to pay cash for the lot. In some cases lenders will advance on the land value, but generally to only 50 or 75% of the purchase price of the land.
When building a home on your own it is not uncommon to have as many as four different kinds of financing before the new home is complete. This can include a land loan, draw mortgage, bridge financing and final mortgage. It is imperative that you are working with a competent mortgage planner to arrange and organize all of the different forms of financing. It is complicated.
Energy Efficient Homes
This is the way of the future, for good reason. Building an energy efficient home is your contribution to the environment and to your pocket book. Default mortgage insurance providers such as CMHC offer up to 10% off insurance premiums and wave the premiums for increased amortizations. If you are building with a home-builder, contractor, or self, you need to know the benefits of building efficient. There are many steps involved in qualifying for these energy efficient discounts and your Axis Mortgage Planner will be happy to assist in the process.