Building a new home comes with a big to-do list. On top of this list is arranging for proper financing to build your home. Here’s some common Q&A to help you understand how builder mortgages work.
What type of mortgage do I need to build a house?
There are two types of mortgage products available when building a home, progress draw mortgage and construction completion mortgage. You need to ensure the mortgage product offered by your lender is one of these builder mortgages. They secure a rate cap for the length of time the builder requires. Not all lenders offer builder mortgages or guaranteed rates beyond four months.
What is a rate cap?
A rate cap locks in the maximum interest rate you will receive for your mortgage while building a home. Rate caps are based on the rates offered when you apply for the mortgage. The longer the rate cap required during the build, the higher the interest rate usually. Rate caps guarantee a rate anywhere from four months to over a year. If the rate cap expires, current rates will take effect.
What determines how long my rate cap needs to be?
You need to go back to the first question about the type of mortgage the builder requires. If a builder requires you to be approved for a progress draw mortgage, the rate cap generally needs to be 4-6 months long. A builder needs to get the home to a certain stage before requesting funds (a first draw) from your mortgage. If a builder requires a completion mortgage, the rate cap generally needs to be between 9-14 months. The builder needs to complete the entire build before the mortgage advances, in this case.
Can I stay in my current house while I build my new one?
Every homeowner will have a different scenario when building a home. Mortgage brokers can strategize and restructure your finances to come up with the deposits required by the builder to start the build. For peace of mind and to ensure you have enough cash to work with, many people opt to sell before beginning construction on a new home. They rent or move in with family for a short time.
Can I change the details of the mortgage after the first draw?
When your builder requests the first draw on your mortgage, most of the details get locked into place. You can no longer include upgrades into the mortgage amount, the interest rate is locked-in (if you chose a closed fixed rate mortgage) and the details get finalized. If you’re planning to sell a home and pay down your mortgage once everything is finalized, an open mortgage may be a good option.
If my progress draw mortgage funded as an insured mortgage, but my house sold, and now I can afford a conventional (uninsured) mortgage…what happens to the insurance premium?
As mentioned above in changing the details of the mortgage, the mortgage funded as an insured mortgage, so you will still have to pay the original mortgage premium to the insurer. The premium is part of the original terms and conditions of the mortgage, regardless of the default insurance being cancelled.
Can I port my existing mortgage to a new construction mortgage?
For completion mortgages, you must stay with your current lender to use the portability features. Commonly, the new mortgage must fully fund within 90 days of the old mortgage being paid out. Please note that conditions vary by lender, other qualifications may apply. For progress draw mortgages, it’s a bit more complicated. Not all lenders offer this mortgage product. Contact your mortgage broker for the details and how it would work for your situation.
By now, you should have a clear understanding of how a builder mortgage will work with your financial situation. We are just a call or an email away if you want to contact a member of our team to clarify anything you may not fully understand.