How Does A Construction Mortgage Work

The Construction Loan Lender Will Check On Your Project Periodically

Lenders face higher risk with new home construction loans, so they tend to be more careful about overseeing their investment. You can expect a lender representative to show up at your worksite periodically, especially when a new round of funding is supposed to be delivered.

Not that the representative is an inspector for the quality of the work but ensures the stage of construction is complete before they release the next round of funds to you.

When people ask, how to get a construction loan, this is a key point to go over with them.

Is It Harder To Get A Construction Loan

Yes, it is harder to get a construction loan than a regular mortgage. Not only does the borrower have to provide financial information, but the contractor or builder does too. They must submit a signed construction contract plus a detailed project timetable, a realistic budget, and a comprehensive list of construction details. Some lenders set more stringent standards for construction loans and demand higher down payments as well.

What Is A Construction Mortgage

A construction mortgage allows you to draw down on the full amount of the mortgage at predetermined stages of the home construction. Let us explain.

Construction mortgages are given on a progress advance basis. The full amount that you need to borrow, in order to complete your construction, is given to you in stages â otherwise known as âdrawsâ â as you complete various levels of completion.

If you already own the land you want to build on, a first advance is available as equity take-out. If you have not yet bought the land, a first advance is available to assist you with the purchase of a vacant lot.

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How To Get A Construction Loan

Here are the basic steps to get a construction loan:

Tips For Managing Your Finances

• If youre interested in taking out a construction loan, but are unsure of whether your current finances will allow it, get the answers you need from a financial advisor. Luckily, finding the right advisor that fits your needs doesnt have to be hard. SmartAssets free tool matches you with financial advisors in your area in 5 minutes. If youre ready to be matched with local advisors that will help you achieve your financial goals, get started now.
• Building the house of your dreams can be an incredible experience, but if you arent careful, it can also break the bank. Be proactive, and before you build, set up a savings account. This way, you can set aside funds in case unexpected needs arise.

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Types Of Construction Mortgages In Ontario

There are several types of construction mortgages available in Ontario, each with its own set of benefits and drawbacks. The most common type of construction mortgage is the standard fixed-rate mortgage, which offers a fixed interest rate throughout the loan period. This type of mortgage is perfect for borrowers who want a fixed interest rate stability. However, it can be more expensive than other types of construction mortgages.

How To Get A Construction To Permanent Loan

If youre interested in taking out a construction to permanent loan to build a home, the first step is finding the right lender. This type of loan may be offered by your current bank but you can also look online for other options. Comparing qualification requirements and loan terms can help you narrow down which lender you might want to work with.

Keep in mind that qualification requirements for a construction to permanent loan arent necessarily the same as other mortgage loans. For example, there may be requirements for the property itself. You may be limited to building a single-family home that you plan to use as a primary residence, versus a multi-family home, even if you intend to live in one of the units.

You may also need higher credit scores and income or a larger down payment to qualify. As with other types of mortgage loans, the lender will review your , income, assets and debts. Youll need to provide a copy of the building plans and your building contract. The land may need to be appraised and of course, youll need to have a perc test done to make sure you can build on it.

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Don’t Run Out Of Money

So, as part of the mortgage approval process, the borrower must prove that no-one is going to run out of money between draws. Everyone needs to know how the cash will flow before you even get started. Proving you won’t run out of money can be accomplished by documenting that:

• You already own the lot or the builder will supply the lot and transfer title to you at first draw, regardless of whether builder has been fully paid for lot or not.
• Builder agrees to carry the financing between draws using builder’s own banking/cash resources
• Borrowers have enough extra cash-on-hand or a line of credit available to buffer between draws and/or to allow for cost overruns
• Borrower already owns the lot, so the lot value is recovered from the lender throughout the draw process.
• Bank of Mom & Dad can and are willing to ‘backstop’ the project.
• Rule of thumb: For you to acquire land and build, you need about 1/3rd the total project cost of your own money. Ex. $600K all-in project likely needs $200K of cash/equity to make it happen.

Speak To A New Construction Loans Expert Today

If you have questions about new construction loans or want to speak to an expert for the right advice, call Online Mortgage Advisor today on 0808 189 2301 or make an enquiry here.

Then sit back and let us do all the hard work in finding the broker with the right expertise for your circumstances. We dont charge a fee and theres absolutely no obligation or marks on your credit rating.

Ask us a question

We know everyone’s circumstances are different, that’s why we work with mortgage brokers who are experts in new construction mortgages.Ask us a question and we’ll get the best expert to help.

Onlinemortgageadvisor.co.uk is an information website all of our content is written by qualified advisors from the front line, for the sole purpose of offering great, relevant, and up-to-date information on all things mortgages.

Online Mortgage Advisor is a trading name of FIND A MORTGAGE ONLINE LTD, registered in England under number 08662127. We are an officially recognised Introducer Appointed Representative and can be found on the FCA financial services register, number 697688.

The Financial Conduct Authority does not regulate some forms of buy to let mortgage.

Think carefully before securing other debts against your home. As a mortgage is secured against your home, it may be repossessed if you do not keep up with repayments on your mortgage.

*OMA Mortgage Approval Guarantee is subject to you providing satisfactory documentation. See T& Cs.

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Stage : The Initial Stage

This is where you apply for the mortgage. Your application will be assessed by an expert from the bank who will decide whether or not to give you the loan based on the assessment of your financial situation and any other relevant factors . You receive 15% of the total loan when 15% of the construction is finished.

You Will Need To Have Detailed Plans For The Construction Project Before Getting The Loan

When getting a house loan to build, you cant just provide your financial details like you can with a mortgage.

You need quite a bit more to qualify, including a builders contract that lays out the draw schedule for the funds, detailed plans on the project, and a construction timetable.

You will not be able to get away with just a floor plan but a detailed set of construction plans.

The budget has to be realistic for the type of property you are building. Getting all of this information requires working with a builder to produce the necessary documentation. Expect to spend time gathering everything you need to qualify.

Before committing to build a custom home, you should always ask the builder a ton of questions beforehand. Many of the things to ask will be centered around the builders qualifications and reputation.

It is vital to thoroughly interview a builder before choosing one. It is highly recommended to get cost estimates from at least three builders before ultimately selecting one.

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Differences Between A New Construction Mortgage And A Traditional Mortgage

In a traditional mortgage, the borrower applies for financing, the lender grants their approval and gives the borrower a lump sum in order to pay for their house. On the other hand, a new construction mortgage is specifically catered to those who want to build their own homes. Its designed in a way that helps a person finance the building process while protecting the lender usually a bank at the same time. Unlike a traditional mortgage, those applying for a new construction mortgage receive their loans in stages. This allows them to pay for supplies as needed while also preventing the lender from losing all of their money if the project fails at start-up.

Other major differences between a new construction mortgage and a traditional mortgage are how long their terms are, how they are disbursed, and their down payments.

• Term: While traditional mortgages are fairly long-term, commonly lasting decades, new construction mortgages are very short-term. They often last one year or less.
• Disbursements: While you get the full amount of your homes value to purchase a home with a traditional mortgage, when it comes to a new construction mortgage the amount is given at different stages of the construction process.
• Down payment: The down payment on a new construction mortgage is often higher than it is on a traditional mortgage because the lender does not have your home as collateral like they do with a traditional mortgage.

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Cost Per Square Foot Of Building A Single

Depending on the type of home you want to develop, there will be a big difference in construction costs. Builders offer two types of home construction plans stock andcustom-built homes. Stock homes are pre-designed to build efficiently. However, you have less control over the design.

A custom home can be completely designed to meet the owners wants. However, they are a lot more expensive. Stock homes range towards the bottom of the cost per square foot to build. Whereas custom homes can exceed $700 per square foot in construction costs for most cities.

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What Documents Youll Need To Provide The Lender For A Construction Loan

Just like when you procure financing for purchasing a traditional loan, there are several documents youll need to provide the lender to get a mortgage. The resource covers the financial information youll need to disclose, but the lending institution will also require the following as well:

• A building contract between yourself and the builder or contractor .
• Copy of the builders/contractors license.
• A set of blueprints of the house you are building.
• Detailed specifications on how the home is being built things like the type of heating, plumbing, electrical, kitchen, baths, etc.
• Any quotes outside the building contract, such as swimming pools, sheds, landscaping, etc.
• If you are purchasing land as part of the construction loan, the lender will require a land survey. You might have an acre of land or 5 acres. The lender will want to know exactly what they are lending on.
• A breakdown of the cost of construction.

It should be noted that as part of the process of approving your construction loan request, the lender will do a home appraisal to make sure of the market value. Like any other mortgage, the lender wants to make sure they are lending on the appropriate amount.

All of these things are part of the construction loan process.

Can I Receive Money To Purchase Land With A Construction Loan

If you do not already own land to build on, your first construction draw would usually be used to purchase the land. This first draw can be paid in advance before construction starts, and can be from 65% to 75% of the cost of the land. Not all lenders pay the first draw in advance. You might be expected to cover the vacant land purchase cost with your own money.

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What Are The Requirements For A Home Construction Loan

Unless you get a home construction loan through a government agency, like the FHA or the VA, youll typically need to meet conventional mortgage requirements, including having a credit score of 620 or higher and a debt-to-income ratio below 45%. Depending on the lender, you may be required to make a substantial down payment, possibly up to 20%.

In addition to all the requirements for a traditional mortgage loan, youll also need to show the construction plans, schedule and contract that you have with a licensed builder or contractor.

Consideration For Securing A Construction Mortgage In Ontario

A construction mortgage is distinct from a conventional mortgage in a few ways, so its important to be prepared.

• First, youll need to have a detailed construction budget and timeline to get approved for a construction mortgage. The lender will want to see and access that you have a realistic plan for how much the project will cost and how long it will take to complete.
• Second, youll not be allowed to make any changes to the amount requested once you have filed for the mortgage.
• Third, the financial advisor might ask you to hire an evaluator before all the five stages before releasing the amount.
• Lastly, youll need to be prepared to make interest-only payments during the construction period. This means that you wont be building any equity in your home during this time.

If youre prepared for these components, you should have no problem getting approved for a construction mortgage. Just be sure to shop around and browse to compare rates from different lenders before deciding.

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Should I Seek Professional Advice

Yes. One of the qualified brokers we work with can make the process of finding a successful new construction mortgage so much easier.

They can take the time to understand exactly what you need and what you would like to achieve with your construction project to find and compare the best new construction mortgage options for you.

As well as this, an experienced specialist will know the new construction mortgage companies to approach which can speed up the process for you and help prevent unnecessary rejections on your credit file.

Definition And Examples Of A Construction Mortgage

A construction mortgage is a specific kind of short-term home loan program that funds the cost of building a home. It can convert into a regular mortgage after a set amount of time, or it can be a construction-only loan that comes due once the project is complete.

• Alternate name: Construction loan

A construction mortgage is most commonly used by someone who wants a new-construction home and needs funds to pay the builders as they complete each phase of construction. Or it could be used to hire a contractor to construct a new home on property or renovate an existing home.

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Can I Use My Land As Down Payment For Construction Loan

And the answer is, without a doubt, yes! We spoke with Laurie Brooks, a Mortgage Loan Originator at Arbor Financial, to learn more about how the process works, and she provided us with an example. Simply said, if you already own property, you may utilize the equity that you have built up in that land as a down payment for your construction financing.

Example: Financing A Stock Single

If you are building a stock home in theGreater Toronto Area housing market, you can expect the cost per square foot to range between $115 – $215. If the home you are building is 2,380 square feet, you can expect to pay $392,700 in construction costs .

Additionally, you will need topurchase land in Ontario. As shown in ourhow much does it cost to build a house article, the average cost per acre in Ontario is $11,446. You could also use a differentmortgage to buy land.

This results in $404,146 which should be multiplied by a 20% safety buffer. The final cost is $484,975. Assuming you finance with a 75%loan-to-value, you will need a down payment of $121,244. You can also use aCanadian construction loans calculatorto understand the total costs better.

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