There are really 2 ways to make construction financing come together for a new home purchase. A completion mortgage and a draw mortgage. If you’re purchasing a new home, your builder will likely have requirements for what type of mortgage they expect you to have.
Many production builders, like Streetside Developments, Shane Homes, , Homes by Avi or others, will expect you to have a “Completion Mortgage.” This means that you provide your 5% down payment funds at the time that you write the offer and then the rest of the funds at closing.
If you’re purchasing a new build, rental property, the builder may require that you put 20% down payment down at the time of the offer and the rest at “closing.” In this context, closing means the date that you actually get the keys to your new home.
Here is how completion mortgages work:
You walk into a show home with your REALTOR® and decide “this it the one!”
Next, you’re required to write an offer, (yes, you don’t have to just take the price they give you), and provide a small, good faith deposit, typically about $1,000 to $5,000 to hold the lot.
There could be some back and forth between you and the builder, but once you’ve settled on a price, the builder will sign the purchase contract and then you typically have 2 weeks to secure your financing.
During the 2 weeks, you work with your mortgage broker to make sure the remaining funds will be available on your “closing date,” (the day you get the keys to your new home).
Once the mortgage has been settled and you’re sure you want to proceed, you waive your conditions with the builder and you’ve got a firm deal. At this time, you will be required to provide the remaining 5% down payment to the builder.
** Important to know: some builders will allow a payment schedule over a few months to provide them with the full 5% down payment. If this is something that you’re going to need, make sure to let your realtor know from the outset so that they can direct you towards builders with the most flexible payment options. **
What is a draw mortgage?
If you’re building a very custom home or working with a smaller builder, there is a good chance the builder will require a “draw mortgage.” This is a mortgage that funds in 4 or 5 stages as the home is completed.
Here is how draw mortgages work:
You work with your architect, builder and REALTOR® to purchase your desired lot and construct a plan to build your dream home.
In some cases, you might purchase the lot ahead of time, in others you might purchase the lot and home together. Every scenario is different!
Your mortgage broker works with the full package of information, the plans, the estimates, the builders timeline and your desired products and rates and constructs a plan that will work with the lender.
You are required to provide all of your down payment funds at the beginning of the mortgage. The best way to think of it is that “your money goes into the deal first.”
As each stage of completion is reached, the lender sends an inspector, and they fund the next stage of the mortgage if the work is completed.
Stage one: Foundation complete
Stage two: Lock up
Stage three: Plumbing and wiring complete
Stage four: Interior finishing - about 85% complete
Stage five: Occupancy!
**To Note: not all lenders provide draw mortgages. When you’re considering a draw mortgage, it is strongly advised to consider a variable rate. This gives you maximum flexibility to switch your mortgage to another lender after all of the draws are completed.**
Overall, whether you’re working with a draw mortgage or a completion mortgage, it’s important to work with a mortgage broker that specializes in this type of transaction. You want to understand if your rate is held for the entirety of the building process, you want to understand what happens if there is a delay in the building process or if something unexpected happens with your employment or credit, and what options you have may or may not have. Lean on your Real Estate team and ask all the questions you need as you navigate your new build.
Looking for construction mortgage providers in Calgary? Use our form below to be put in contact with one of our impact mortgage partners who are experienced with construction mortgage (completion and draw).
Construction financing mortgage brokers in Calgary
Shout out to our talented mortgage partners (who offer some of the best options and advice for our clients) at the Spire Mortgage team for helping us out with this blog! If you have any questions about mortgages, construction financing, or more, please fill out the form below or reach out to the Spire mortgage team directly.
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