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Construction Mortgage: Building Your Own Home

Construction Mortgage: Building Your Own Home

It can be very frustrating to purchase your first home. You can spend a lot of time looking for a new home but never find anything that you like. You might not be happy with the way the house looks or some aspect of the interior like the wiring, the kitchen, or the outlay of the bathroom. In some cases, you might decide to construct your own home and this is where the construction mortgage can come in.

The Construction Mortgage

The construction mortgage will usually cost more than a regular conventional mortgage. If you’re able to see the project through to its completion then you’re going to have a home that works for you because it will be something that you would have envisioned from the very beginning. Before you decide to go this route you have to consider the construction mortgage.

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Land

For construction can begin you naturally have to buy the land. You might decide to buy it land that has an existing home on it and then tear down that home and build your own. If you decide to get an empty lot you might have to secure another loan to finance the lot. When you purchase this land through a home builder you usually don’t have to go this route. to actually purchase the land you’re going to have to have a decent income and a good credit score just like you would for any regular mortgage.

In most cases, you need to put a large deposit on the land and this is usually around 25 to 35%. You may also be able to open a home equity line of credit or get a loan from a private lender. In any case, you will have to talk to a financial expert to determine exactly what you can afford and what is the best way to go about it.

You have many factors to consider before you buy the vacant land. It can be a good idea to know who previously owned the land and how the land partition should be handled. You will have to factor in costs such as the sewage disposal system, drinking water system, and other utilities which will need to be installed.  it’s a good idea to have a clear picture of the land you’re going to buy before you actually purchase it.

Buying From a New Home Builder

One option is to buy a home that is already under construction from another builder and you don’t want to go through the motions of constructing the home on your own. This is quite common in communities where there are new neighborhoods being built. You do have a say in how the house is going to look but you’re not doing a lot of the heavy work involved. You will still have to pick the land that you want, the finish of the home, the layout and what is going to be included with the home.

Understanding The Progressive Draw Mortgage

The first type of mortgage you have as an option is called the progressive draw mortgage. The lender will grant you as the buyer the funds that you need. These funds will be given to you into various installments as the project is being built. During the phases of construction, the lender is going to send a home inspector to see how the building is progressing. Everything needs to be progressing according to the schedule that you have laid out with the lender. The inspector will send a progress report to the lender and then if the lender approves it will grant you more funds to continue the construction. if the inspector determines that your construction is not progressing satisfactorily then the lender May withdraw the funds. There are four main phases of the progress draw mortgage.

Phase One

When the plot of land is bought and the construction of the home begins, then the foundation draw is received. This draw is only granted on land that has no mortgage or little mortgage on it. If you’re still at mortgaging this land you will only receive the first draw when around 30 to 50% of the house is finished. You will have to cover the cost which is associated with completing the first 30 to 50% of the home.

Phase 2

This phase is called the lock-up draw. Went around 30 to 50% of the home is completed you received this. For example, if doors are installed in the windows are already in and your foundation is laid so that the house can be locked up once work is done for the day, this is considered the lock-up draw.

Phase 3

Space is called the drywall draw. You receive this one around 65 to 70% of the home is finished. This is when the heating system is put into the home and the drywall you have installed is ready to be painted.

Phase 4

This phase is called the completion draw. When the house is nearly finished or completely finished at around 90 to 100% you will receive this. When the plumbing has been installed and the electricity is working and all paperwork is signed,  this home is considered to be in the completion draw phase.

Completion Mortgage

When you get a secured completion mortgage this means that you have purchased the home through a new home builder and the construction of the home is already completed. This type of mortgage, you’re able to move into the home right away. The Builder won’t be compensated until you have possession of the home.

This type of mortgage can be appealing to home buyers because the terms of the mortgage aren’t official until 30 days before the buyer actually takes possession of the house. Before the 30-day period begins as a home buyer you can make changes to the mortgage like increasing the financing or making upgrades. Before the completion mortgage is done the home buyer should not make any significant changes to their job, a line of credit, purchasing a larger loan, or anything that is going to straight from the specifications laid out by the lender. If you deviate from the lender’s guidelines, then the mortgage might be revoked.

Considerations

This type of mortgage is not available everywhere in Canada. In New Brunswick and Quebec, there is no progress draw mortgage available. You will have to have everything laid out and ready to go before you talk to the lender. You should have blueprints, construction plans, and know the related costs as well as have a contract for the construction of the home, If you’re building at the home yourself then you need to understand the labor cost and the building material cost that is going to be involved. If you’re buying a lot, then you have to get permission from the municipality to build a home on that lot.

Finances

You should also have a clear understanding of your finances because it can cost quite a bit of money to have a construction mortgage and to complete a home. In many cases, you can go over your budget so you have to be prepared for these problems that might crop up during the construction of the home. Sure you speak to your financial advisor so you understand your finances and have a backup plan in case things go wrong.

Summary

These are the basics of a  construction mortgage. Talk to a financial advisor such as a mortgage broker to determine what exactly is going to be required of you if you wish to take on a construction mortgage. This type of mortgage can be a little bit more complex than a traditional mortgage so you need to understand fully what you’re getting into before you commit to any construction mortgage.

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