https://peterpaley.com/home-building-construction-mortgages/

Let’s talk about building a new home. Over the last few years, it has been a very stressful process. Global supply chain problems, long delays, and rising interest rates unquestionably put much financial strain on many home buyers. In Winnipeg, homebuyers walked away from their contracts due to higher interest rate costs and not being able to qualify for the mortgage any longer.

The real reason I wanted to post about this today was that we are now offering a 12-month rate hold for new construction mortgages that are default mortgage-insured & done on a completion basis. At the time of writing, we can offer 5.89% for a 5-year fixed-rate mortgage and hold it for 12 months.

This is more of a pre-qualification, rather than a pre-approval, meaning, that will will get the lender to approve you for the purchase now, however, the onus will be on the borrower to re-qualify 120 days before possession.

There are two kinds of construction mortgages. The “Completion” and “Construction Draw”.

The completion mortgage means that you are going to give your builder a 5%-10% deposit, get qualified for the mortgage, pick out all your finishes, and the builder will have a house ready for you in 4-12 months. 100% of the deposit will form all or part of your down payment and You don’t have to really do anything else but update a couple of required mortgage documents closer to the possession date.

The construction draw process is more complicated, and involved and there is a greater chance of errors and more risk to the lender. In fact, many lenders aren’t even considering these applications any longer. The builder will divide the contract into usually 5 components so that the build can be funded as the home is being constructed. The 5 stages or draws are:

1. Land Advance (100% for insured files and 50-75% for conventional)
2. Basement/Foundation (15-17% complete)
3. Framing & Roof (30-35% complete)
4. Lock-up (60-67% complete)
5. Completion (97-100% complete).

The lender won’t provide any of the required funds upfront with the exception of the land advance. The borrower will need to stay one step ahead of the contractual payments. This means the borrower will need enough funds to for example fund the entire cost of the foundation/basement. Once that stage is complete, the lender will request an appraisal at the borrower’s expense to confirm the basement is completed. This will happen at each stage.

Sounds pretty easy right?

The challenge that we run into a lot is that the builder’s contract doesn’t always match up to the prescribed draw schedule set out by the lender and the insurers. This means that the borrowers will need to be able to have the means to fund any contractual shortfalls. Your mortgage professional should be able to identify the contractual shortfalls using a simple spreadsheet. However, more shortfalls can happen due to extra & unforeseen costs, weather delays, and as we’ve seen through the pandemic, massive cost increases in supplies. Most lenders will want to see the financial means to not only qualify for the mortgage but to also have a 20-25% cost overrun provision. The reasons for this were listed above but the biggest cost overrun in most home builds is upgrades. Yes, when a new home buyer walks into the lovely showrooms to pick out cabinets, floors, countertops, and tiles, what one can afford doesn’t look nearly as nice as what one cannot afford.

If you are interested in going through the building process whether a completion or a construction draw we would like to help!