Home Builder’s Mortgage Basics

Let’s face it: you like to have your own house but don’t know where to begin or have no idea how to purchase one. With so few options available in the market (due to the pandemic) and a number of online real estate deals floating on the internet, your plans of owning – or even buying – a house can become a nightmare you’d wish you never had.

Thankfully, you have a better and a much more reliable* alternative to acquiring a property to choose from, and one of these is a home builder’s mortgage.

*(NOTE: Most, if not all, so-called “mortgage experts” will provide you with quick solutions that not only appear dubious but downright irregular no matter how you look at them. Easy loan approval within 3 days, improve your credit score in one week, and other similar offers are mostly carrot-in-front-of-a-stick tactics done by scammers and con artists to steal your money and waste your time.)

There are a number of choices available for you should you look into buying a house: (a) apply for a mortgage loan, (b) purchase a pre-built house, (c) buy an empty lot, (d) acquire a semi-finished property, (e) purchasing a foreclosed property from banks at bidder’s price, and (f) erect a DIY house (“LEGO” house).

Of the choices you have been given above, your wisest option is to choose a mortgage loan because of the flexible terms and interest rates it offers depending on the type of loan you have.

In this blog, we are going to briefly discuss a special type of mortgage you can apply for and how you can proceed in securing one.

If you’re ready to break ground with us then let’s begin…

Home Builder’s Mortgage Defined

A home builder’s mortgage – also known as “self-build mortgage” or construction mortgage – is a type of loan that a lender will give you in order for you to build a house. Any interest you need to pay is due during the construction phase of your property.

In other words, the amount you will borrow is used exclusively for the erection or building of your house from the ground up: it is neither a renovation loan nor a pre-build housing loan. This is your build new home construction loan funding instead.

You have to remember this specific distinction; otherwise, your loan could and might be revoked or disapproved.

Things to Consider Initially

Buying a house, or specifically, purchasing a lot where you can build your own property requires that you have to consider these two conditions first beforehand:

a. Buying vacant land – this is the most common consideration by choice that most first-time house builders will take. (NOTE: consideration by choice means that there are other options available but this one wins as the most popular of them.)

You have to have a favorable credit score and a stable source of income. Moreover, you have to make a deposit amounting to at least 25 to 35% of the land’s total value.

Be forewarned that since you are not purchasing a pre-built house, you will have to spend more money to secure vacant lands such as legal fees, separate loan amounts for the vacant land you like to buy, and others.

You will also have to content with the idea that you will be primarily responsible for the whole construction of your dream house – from the planning phase to the end-of-construction phase. Hence, be prepared for costs to mount up on your house building project.

b. Buying from a new home builder – some homebuyers don’t want to trouble themselves with being their own contractor; hence, they will opt to choose this option to save them from ballooning costs.

This presents certain advantages to you like (a) choice of home design, (b) layout design, (c) option for additions, if any, etc. Make sure that you are dealing with a reputable home builder and not with any suspicious-looking contractor you saw on the internet that has a record of duping first-time house builders/owners. Conduct your research carefully to save you from future disappointment and loss of money.

We’re hoping that presenting the above considerations will help you out in knowing how to get a loan for new construction so that you will not base your decisions on wrong assumptions.

Classifications of Home Builder’s Mortgage

If you choose to proceed in building your own house then you have to be familiar with 2 classifications that you need to know.

a. Progress Draw Mortgage – this mortgage classification indicates that your lender will provide you the funds needed based on the various phases of your house build until its completion. The phases are enumerated below:

  1. Phase 1 – Foundation Draw: this amount is received once the
    plot of land has been purchased and the construction of the
    house has already begun. Make sure that the land has NO or LITTLE
    mortgage on it; otherwise, you will have to settle the cost that
    corresponds to the completion of the first 30-50% of your property.
  2. Phase 2 – Lock-Up Draw: this amount is received once your property
    is deemed 30-50% complete. This entails your house has its foundation
    laid and its windows and doors installed and can be “locked up” or
    “closed” at the end of the construction day.
  3. Phase 3 – Dry Wall Draw: this amount is received once your property is
    already 65-70% complete. This entails that your house has its heating
    system installed and running plus its drywall(s) ready for painting.
  4. Phase 4 – Completion Draw: the amount is received once your
    house is rendered finished or almost completed around 90-100%.
    This means that its plumbing and electrical connections are in
    good working condition and the property is or can be habitable.

(NOTE: You have to remember that your costs can and will balloon if you go this route; hence, be ready to have enough capital to support your additional funding for other expenses involved.)

b. Completion Mortgage – this loan pertains to your new house bought from a new home builder and that the construction is officially finished and ready for you and your family to move into.

This is more appealing to many first-time home builders/owners since the mortgage repayment is not immediately demandable until 30 days have passed and before the owner takes full ownership of the house.

If you choose this option then you have to flexibility to change the terms of your loan like increasing the loan amount to fund additional expenses. Make sure, however, that your status upon application will not change (i.e. job change, applying for another loan, etc.) because you face the risk of having your mortgage loan disapproved or even revoked.

Now that you have a full understanding of what a home builder’s mortgage is and what it entails for you to apply for one, we expect that you will be more confident to know how to get a loan to build a new house.

Being aware of the nuances of this type of mortgage will aid you not only in making an intelligent decision but also in avoiding pitfalls that will render your house-building project an utter failure or a bitter experience.

Final Thoughts

Owning a house is not an impossibility; however, there are conditions to be learned and understood beforehand that will make your house buying (or house-building) just as exciting and as practical as you want it to be.

Know that there are many types of loans to consider but if you are targeting to erect your own house using your own resources (i.e. money, tools, manpower, etc.) then you have to choose a home builder’s mortgage as your loan source. Under this loan agreement, you will be responsible for the entire construction of your dream property – from breaking ground to completing your property build.

Likewise, there are constraints to take into mind when choosing a home builder’s mortgage like the 2 classifications we delved into a while ago.

Be wise in your choice of the mortgage loan and also be mindful that when you’re building your own house, you must give priority to the money involved and to the lender from whom you will borrow your funds.

We are a trusted financial company that has helped 96 clients materialize their dream homes in Canada. Our vision is to help families build, develop, and/or improve their homes for them to live conveniently and comfortably.

Call 416-825-0142 or email dominionlendingcentres@oneteamservesyou.com today to learn more.

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