A construction mortgage is a mortgage where funds are released at 3 to 4 different stages as the house is being constructed. Construction mortgages have a higher risk associated with them, as the lender is lending against the house which is under construction. It is difficult for the lenders to get their money back if things don’t go as planned. The lenders expect you to use your funds to complete the every construction stage with your own funds and then lenders release the funds when stage is completed. An appraisal by certified appraiser is required for each draw in which an inspection report will detail the percentage completion.
Draws Schedule for the Construction Mortgage
1st Draw to assist with purchase of lot (land) or take equity out of lot you already purchased. Normally about 50% value of the lot.
2nd Draw at 35% of the construction complete, at lock up – windows, doors installed and completed roof.
3rd Draw at 65% of the construction complete, dry wall installed taped and finished.
4th Draw at least 97% complete or Final Occupancy
Types of construction mortgage Financing
- Using a Builder/Contractor:
You have entered into an arrangement with the registered builder to build your house. Builder is using your construction mortgage financing to build your house.
- Building yourself:
You are your own contractor and hire the sub-contractor or trades man to do the construction for you.
Types of construction mortgage lenders
✦Major Banks and credit unions:
If you have good credit and steady income and you can satisfy their lending criteria, this is a good option for you. You may have to pay higher interest during the construction time period but once the construction is complete you can enroll into their fixed or variable mortgage rates.
✦Private mortgage lenders:
If for any reason you are not able to get approval by the major banks or credit unions then private lenders will be a good option. They charge a higher interest rate but will assist you with the funding when everybody else says no. You will get the financing for the construction process and once your house is built you can move to any traditional lender at lower interest rates.
Documentations required for the Construction mortgage.
✦Employment and Income documents (paystubs, job letter, NOAs, etc)
✦Proof of down payment
✦Construction estimate (if Self Built)
✦Signed builder agreement (if builder is building)
✦Offer to purchase for land or proof of land ownership
✦Appraisal of the land as it is and after construction
Approval Process for the construction Mortgage
Major Banks and credit unions: approval process is the same as regular mortgage, besides having good credit you have to satisfy their income requirements to afford the requested mortgage amount.
Private Lenders: the approval is based on the equity. As long as you can prove that you will be able to build the house and not run out of money before the construction is complete, you will get approved. In order to make sure their investment is safe, private lenders generally don’t go over 60% value of the property at any given stage.
Interest rates for construction mortgage
Bank and Credit Unions: As construction mortgage is high risk for the lender than regular mortgage, depending on the lender, interest rates can range up to prime + 4% in some cases. Once the construction is complete you can roll your mortgage into regular lower interest rates.
Private Lender: Interest rates with private lenders are higher than what major banks offer. But it does not mean it’s going to cost you a fortune, an average house takes about 4 months to complete. Therefore the high interest rate will only be for 4 to 6 months. After the completion of your construction you can move to a regular mortgage at a lower interest rate. A mortgage professional can help you find the lender who will take on the mortgage once it is complete.