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Financing a new build – it seems so confusing! With terms like progress draws, turnkey, demand loans, deposits and downpayment floating around, it’s no wonder that first time buyers have lots of questions.
The best way to avoid complete overwhelm and to choose the right mortgage for you is to arm yourself with as much information as possible. The right mortgage will save you money, stress, time and risk!
Step 1: Get Pre-Approved
Getting pre-approved for a mortgage should be your first step toward building your home. A pre-approval will provide you with specific information about your budget and purchase. The mortgage professional that you choose will consider personal information such as credit score, income, down payment and more.
By engaging in a pre-approval, you will get an idea of how much the bank will lend you and at what rate of interest. A great professional will also advise you if there is anything that you should do before actually engaging in a purchase contract to help improve your credit score.
A pre-approval is the perfect place to start your process because it will provide you with an idea of what you can afford and will allow your builder to have some clarity regarding the budget and scope of your project.
Step 2: Determine The Type Of Mortgage For You
While any mortgage professional will talk to you about the advantages of open vs. closed mortgages, rates, terms and amortization periods, your builder will need to know if you’re planning on doing a turnkey contract or a construction draw contract.
In a turnkey building contract, your builder agrees to build your home as per the specs quoted & finishes selected by you. Financially, you are only required to pay an initial deposit up front and the balance is due on closing- very similar to the type of mortgage you would place on a resale home. This type of project is much easier for clients and usually results in a lower rate of interest on the home.
During a turnkey build, your builder will hold title on the land.
CONSTRUCTION DRAW CONTRACT
The term “construction draw” refers to the process of paying for your new home. When you are building in a construction draw contract, your builder will usually require 3-4 construction “draws” (draws= payments) throughout the construction of your home.
Typically, your builder will collect invoices from trades for work completed & will request a draw from you. You will contact your lender who will then require an appraisal of the work completed to date before releasing the funds.
During a construction draw build, you will hold title on the land.
Typically, it is much easier & less stressful for clients to engage in a turnkey build. Just be sure that your builder is financially strong enough to offer this option.
Step 3: Bring In The Builders
The third step in your home financing adventure is to bring in the builders for quoting. This process can get a little confusing for homebuyers who are looking for the most value for their money. Your builder should be able to provide you with a quote on the home as well as a comprehensive list of what is included in that price. If one builder is missing some items in their quote, makes a mistake or underestimates allowances, their quote will look much lower than their competitors at first glance.
When comparing quotes, be sure that you are always comparing apples to apples. Does one builder have a higher kitchen budget built in? Is the lower priced builder pricing very basic/entry level finishes? It is crucial to your budget that your builder understands your tastes and has priced in the level of home that you’re actually looking for.
Once you’ve settled on a builder and a price, you will sign an Agreement Of Purchase and Sale which will outline all of the terms and conditions of your build.
Step 4: Financing Approval
Many first time buyers confuse the terms “pre-approval” and “approval”. While the pre-approval is very important to your process, your lender cannot actually approve your financing until they have the details of your project. To give you an actual financing approval, your lender will require a copy of the signed Agreement of Purchase & Sale, the house plans, and the building specifications provided by your builder. The lender then confirms that the proposed home will appraise for the purchase price that you agreed to.
(No lender will finance a mortgage that is greater than what the home could sell for).
Once the lender is satisfied that the borrower and the proposed property meet all of their conditions, they will forward a letter of financing approval. Yay! This very exciting step in the project usually signifies the beginning of construction.
Step 5: Staying On Budget
Financing has been approved and construction is underway… unfortunately, your job is not over yet! Now, it is crucial that you stay as close to the original purchase price as possible. A client who decides to add $40,000.00 in upgrades may get a terrible surprise at the end of the project if their bank is not able to qualify them for this increased price or if the home doesn’t show the increase in value.
This is why it’s important that your builder is accurate in Step 3 when pricing the home. A few extra surprises and you can risk your financing and your budget.
Step 6: Closing
Ah Closing Day… you made it through construction & your home is finally complete. At this juncture, your builder will settle up any differences from the original purchase price through your lawyer. Perhaps you came in under budget? You’ll be getting a cheque on closing day. Or, maybe you decided to add a few items during construction? These will be added to your purchase price & mortgage. Ensure that you’ve engaged a lawyer who is competent in real estate law to manage this transaction seamlessly.
Building a new home can be overwhelming but it doesn’t have to be. Do your homework and ensure that you are working with the very best professionals in their fields to make your experience as stress free as possible.
Disclaimer: This post content is sponsored by Royal Bank of Canada, however the views and opinions expressed herein represent my own and not those of Royal Bank of Canada or any other party and do not constitute financial, legal or other advice.