Construction mortgages or draw mortgages are financed differently than a traditional home purchase mortgage. On a construction draw mortgage, the funds are advanced in draw phases until the build is completed. With a stick built home there are typically 4-5 draws and if land being purchase one initial draw for the land payout.
A home build can be financed with a minimum down payment of 5%, provided the builder included the land in the quote. If the land is being purchased separately, you will be required to have 25% down payment on the land which rolls into the total purchase price. The first draw of the mortgage will be used to buy the land or pay out the existing loan on the land and construction will continue until all funds are released leaving you to pay only one mortgage.
For example, land is 100k and the build is 400k. You would need a mortgage for 500k and down payment of the land at 25% would be 25k this would be rolled into the total mortgage of 500k so essentially you are only putting down 5% of the total loan or mortgage financing for the land and the build. A request for draw is submitted and the lawyer releases the funds to the builder once it is confirmed complete to that phase.
The builder you hire to complete the build and will submit a quote, provisions, and floor plans to your mortgage broker to accompany your application to the lender.
Your builder will be responsible for handling all aspects of construction including permits and providing you New Home Warranty.
During the build process, you make mortgage payments only on the funds advanced.
Specific details of this are on every mortgage commitment letter.
Advance Stages/ Draw Schedule:
Below is common draw schedule used by lenders:
Draw Stage Required Building Completion Construction Stage
1st Draw (Optional) 15% complete Excavation and foundation complete
2nd Draw 40% complete Roof is on, the building is weather protected (i.e. airtight, access secured)
3rd Draw 65% complete Plumbing and wiring is started, plaster/ drywall is complete, furnace installed, exterior wall cladding complete, etc.
4th Draw 85% complete Kitchen cupboards installed, bathroom completed, doors have been hung, etc.
5th Draw 100% complete Ready for occupancy with seasonal and exterior work completed.
Important Things To Note
Prior to each draw being advanced, an inspector will go to the property to ensure the builder is following the NHW (New Home Warranty) policies and to ensure each stage is completed with accuracy before releasing funds to the builder.
The cost of the inspections falls on the borrower. Some banks deduct appraisal and progress inspection fees from each draw.
After your mortgage is approved and signed, you will not able to change your mortgage amount to accommodate any upgrades or changes made to the home.
If getting a new home built is something you have always considered give Mortgage Tailors a call today to speak to one of our trusted mortgage brokers in Edmonton about your mortgage needs. We are always available to answer any questions and help guide you on the home building process.