Whether you’re in the process of buying and/or building a new home, getting a construction mortgage loan is one of the best things that you can do in order to make the home of your dreams a reality.
What is a Construction Mortgage Loan
A construction mortgage loan or construction financing loan is a short-term loan that attracts a higher interest rate than a regular mortgage.
Here in Canada, there are three types of construction loans that people usually apply for are. Those types are single advance construction loans, progress advance construction loans, and raw land construction loans.
Single advance construction loans are loans that allow the buyer to buy a home from a builder. From there, the buyer applies for a mortgage.
Progress advance construction loans are loans in which the borrower advances the money. This occurs at predetermined stages of the construction of the home.
As for raw land construction loans, they are land loans that often require either a higher down payment or equity.
Once the property is completed, you should ask your mortgage broker to apply to a lender that offers the best mortgage rate. If you like, we can be the mortgage brokers who will help you figure out which loan is better for you and your loved ones.
What is a Single Advance Construction Loan
A single advance construction loan or a new home construction mortgage is a mortgage that allows the buyer or the borrower to buy a home from a builder and apply for a mortgage. This is the most common and simplest construction mortgage to obtain.
What is a Progress Advance Construction Loan
As the name suggests, a progress advance construction loan is a loan in which the borrower advances the money at predetermined stages of the construction. In other words, the loan progresses as you make your advance on it.
In order to start the project to finance the initial construction, the borrower should already have funds on hand. Depending on who is doing most of the building, a borrow must require a Tarion Warranty.
What is a Raw Land Construction Loan
A raw land construction loan is a loan which often requires either a higher down payment or equity. Depending on what your financial situation may be, any of the two might hinder your chances of getting a construction loan from most lenders. It will also attract a higher interest rate.
In some cases, you will need to calculate your cost to do the renovation and if you are able to, secure a line of credit to finance the project prior to starting.
If you are making improvements to an existing property, you can approach your bank or speak to any Toronto mortgage broker (or one in your vicinity). Mortgage brokers have access to many lenders who can approve your construction loan.
Getting a Construction Loan Approval
Depending on what your financial situation may be, getting an approval for a construction mortgage loan takes longer than getting an approval for other types of mortgages.
Whether your home is self-built or one being built by a builder that is hired by the property owner, there are many reasons as to why getting an approval for a construction mortgage loan takes longer, most of which our fellow Sunlite mortgage experts can walk you through with a free mortgage checkup.
Qualifying for a Construction Loan
In addition to the normal mortgage qualification documents, you must provide to your lender:
- An estimate of construction cost and material list
- A completed appraisal report
- Architectural drawings
- Building permits
- An environmental and engineering reports
- Builder’s resume and license
- A Construction timeline.
Once the amount of the loan is decided on, then your lender creates a draw schedule. This is usually between four and five draws.
What are Construction Loan Draws
The first draw is usually at about 15% to 20% completion. At this stage, the construction workers complete the excavation and foundation.
The following draw is usually at the 35% to 40% completion mark. Otherwise referred to as the lock-up stage, this happens when the builders finish creating the roof, walls, and doors.
At the 60% to 70% stage, the builder will get the third draw. During this time, the builder completes the drywall, installs the furnace, and completes the exterior wall cladding.
The fourth draw is at about 80 to 85%. This happens when the builder completes the trims, kitchen cupboards, and bathrooms. A final draw will be upon completion of the build.
Prior to each draw, an appraiser inspects the advance of the property to ensure that each stage is completed and that the property follows all city and provincial codes. This program protects consumers of a new home by ensuring that builders abide by the provincial legislation.
Each draw requires a cost, depending on the if additional legal work is required.
So tell us, fellow readers, did you find our guide helpful? What are some things about construction mortgages that you still find confusing? If you’re still unsure as to how construction loans work and/or would like more information about them, give a Sunlite Mortgage agent a call today at 1.877.38LOANS and we will be happy to help you explain the process better.
Also, if you want to know more about how you can make the most out your mortgage, then please, check out our other blogs.