So if you are considering building a home this year, you may want to familiarize yourself with the differences between a draw mortgage and a completion mortgage.
You will discover very quickly once you start discussing terms with our area’s talented home builders that you need to understand what you are getting yourself into.
Let’s start with the completion mortgage. In this case the builder builds the home and will not expect any funds until you take possession of the home or upon completion.
The process looks like this, you choose your builder, lot and floor plan and head to your friendly neighborhood mortgage professional to get a mortgage in place to meet your condition of financing. The lenders will verify your information and sign off on the application so that you can start to build.
The upside of this type of mortgage is that as long as you stay within the lender’s guidelines as far as affordability you will be able to add your upgrades to the mortgage.
You will also not be required to pay a cent, except for the required deposits of course, until you take possession of the home.
But wait! What you really need to know is that the lender will require more information from you 30 days prior to possession. They are going to want to see an updated pay stub as well as a new credit bureau. If your financial picture has made a change for the worse then you may no longer qualify for your purchase.
Given the often long stretch of time between the application and the possession you will have to be diligent in ensuring your credit stays the same.
Any change you are considering making should be discussed with your mortgage professional first. Switching to a new job or buying a new car could very well be very detrimental.
And now we take a look at the draw mortgage. The first part of the process is exactly the same of course. You choose your lot and home and get the mortgage approved so that the builder can get to work.
This type of mortgage is often preferred by home builders.
They are able to draw down the funds at predetermined stages of the home. The upside to the builder with this product is that they can manage the cash flow for their business.
An inspector of the bank goes out to the site once the request for the money is made to determine the work is complete as expected after which the funds are released to the lawyer and then to the builder. There are costs associated with a draw mortgage.
Inspection fees – each inspection costs around $115 give or take and that cost is often passed onto the purchaser by the bank.
Interest payments – some lenders will require you to make interest only payments during the build. That means you could be making a payment on the new mortgage along the way as well as continuing to pay your current rent or mortgage.
You should also know that you will be unable to add the cost of any upgrades to this mortgage. After the first advance the loan is considered to be set in stone so you will have to come up with the cash or another way of paying.
So there you have it in a nutshell, the difference between a draw and a completion mortgage. Until the next time, my friends. Have a great week.
Pam Pikkert is a mortgage broker with Dominion Lending Centres – Regional Mortgage Group in Red Deer.