An Overview of Construction or Draw Mortgages in Grande Prairie
Construction mortgages or draw mortgages are somewhat different than conventional mortgages. If you need a $500,000 mortgage to buy land and build a house, Grande Prairie lenders won’t give you that lump sum up front as they would if buying an existing $500,000 house. On a construction mortgage or “draw” mortgage, the money is paid in several lump sums or “draws” as the project progresses. You can’t just ask for the money – the work must be verified at each stage of the project.
When you’re building a new home, you can finance the home for as little as 5% of the total cost, though this differs from the standard 5% down on a home. For example, you may need to put as much as 25% down when buying the land. The first draw of the mortgage typically pays off the mortgage for the property, since the mortgage lender wants the land combined with the home. If you were buying a $100,000 piece of property, you’d need to put around $25,000 down. The first draw of the construction loan pays off that mortgage and rolls it into the main loan for $500,000. Your 25K down then counts as 5% of the overall loan amount.
The draws on the mortgage itself are advanced by the real estate attorney. However, the broker has to submit the draw schedules. An inspection is done to show that the work has actually been completed and has been done to standard. No one wants to pay for poor work or electrical and plumbing work that isn’t to code, much less pay the remaining 50% of the cost of building walls and decorative tile work that have to be ripped up later to repair the lousy work. Once the property passes inspection, the next “draw” of funds to pay for the next phase of work can be advanced. Depending on the lender, there will be three or four draws, and you’ll have to have an inspection done for each draw to advance. You’ll also have to pay for each inspection usually around $600 for them all that will come out at the draws.
There’s another difference between the typical home purchase and home construction loan. The builder you select will need to submit the quote, specifications and floor plans to your Grande Prairie mortgage broker. If the home design is too unusual, the lender may refuse to fund the project because they think the home can’t be resold if you default on the loan. They can also decline to fund the loan because the builder has a poor reputation for quality or tends to hire unqualified (but cheap) workers.
A self-build refers to when the home owner wants to act as the general contractor or builder of the home. Many Grande Prairie mortgage brokers will pass on these projects altogether. The average home builder is unlikely to collect the many accurate quotes and other documents necessary to allow for properly qualified work and permits. Their lack of experience tends to lead to delays in construction and mistakes that are costly for everyone. You may still be able to get a mortgage for a self-build, but you’re going to have to approach lenders directly.
Your builder will be responsible for all aspects of construction. This includes securing building permits and the new home warranty. They should be paying all of the subcontractors and doing the work as they said they would. It is your responsibility to do detailed research on the home builder, since you may be on the hook for repairing their poor work or paying unpaid subcontractors. If the home builder up and leaves or fails to meet building code, the mortgage lender may refuse to continue to issue more “draws”, leaving you to borrow money through other channels at higher interest rates to pay for completion of your new home. The rules regarding the advancement of funds will be outlined in the mortgage commitment letter.
While the home is under construction, you’ll be obligated to make mortgage payments on the amount advanced to date. If the project comes in under budget, your final mortgage balance will be a little less than expected. If the project runs over the initial mortgage balance, you’ll have to pay for this out of pocket. Call your trusted Grande Prairie Mortgage Broker today 780-357-3993.