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Are you tired of looking for your dream house because every time you return empty-handed? If yes, you might already be wondering to buy an empty lot and start building your own house there. It may seem very difficult, but you will get your dream house in the end. It will be the same as you wanted it to be.
So, if you are a homebuyer who is interested in undertaking such a big project, the mortgage is the best option for you. However, know that a home construction mortgage will require more money and effort than a conventional mortgage on an existing home. But the money and effort are worth it because, in the end, you will have a house exactly the way you wanted it to be.
If you are that audacious person who can undertake such a project, Lionsgate Financial Group has a complete guide for you on how can you make this possible. Continue reading to know everything about the home builder’s mortgages process in Canada.
Buying Vacant Land
The first step of building your new house is purchasing a vacant lot to build it on. It can be an empty land or even an existing home, which you can tear down and build a completely new one. If you are buying an empty lot, you will need to secure a separate loan to finance this lot. But, you don’t need to finance the lot if you are purchasing the land through a home builder.
Similar to other loans, in a home builder’s mortgage, you need a good credit score and a decent income. Remember, you will be required to make a sizeable deposit on the land itself – sometimes 25-35%. However, you may be able to get a loan from a private lender by opening a personal line of credit or by opening a HELOC through another property that you already own.
If you are planning to buy an empty lot, it is extremely important that you take all factors into consideration. It includes doing research into the area and making sure you will be able to get permission from the local municipality to build there in the first place.
Collect information regarding how the property is zoned, who was the previous owner, and how it is partitioned. You will also need to factor in both the costs and the environmental concerns related to the construction of a drinking water system, sewage disposal system and other facilities. Once you are aware of these conditions, the next part is to build the house.
How Does Home Builder’s Mortgage Work?
A home mortgage construction mortgage is sometimes called a self-build mortgage as well. It means you will secure a loan in order to build your own house, rather than mortgaging a home that already exists. Keep in mind that building a home from the ground up can end up being more expensive as the cost of building materials and contractors is high. If you yourself are a contractor, you can design the home and start construction yourself. But there is a big chance you will need to hire a team to help you finish it.
With that being said, there are two construction mortgages that you can choose from. You can either choose one or use a combination of both, depending on your lender’s policies and what province you live in.
1. The Progress Draw Mortgage
In this, the homebuyer will be granted the funds from their lender in instalments throughout the various stages of the build until the project is completed. During each phase, the lender sends a home inspector to the property to review the building progress report and make sure everything is going according to schedule. However, know that, if the inspector determines that the construction is not up to par, the lender might be forced to withdraw their funding.
2. The Completion Mortgage
When you have secured a completion mortgage, it means that you bought the house through a new home builder and the construction is already finished. In such a case, the builder should not expect to be compensated until you take possession of the home. Since your mortgage will be finalized 30 days before you officially take possession of the house, some lenders will require that you put a down payment on the home. However, your lender should allow you to pay it in instalments. Once the home is finished, which must take around 120 days, the completion mortgage itself should simply be needed to pay off the remaining balance to the builder.
Home Builder’s Mortgage Process
The mortgage process for a new home is more complicated and, in many cases, more expensive than a traditional mortgage on an existing property. Not only does it take time and work to build a home, but most lenders require additional assurances before they would begin lending you money. In most cases, a good credit score and a steady income will not suffice. Potential homeowners must show proof to their lender that the construction of their home will be completed within a particular amount of time.
Banks, in particular, will want to make sure that the contractor or home builder in question is licenced and has a track record of quality work. If you want to operate as the general contractor, the lender may be cautious unless you can demonstrate that you are suitably competent to embark on a project of this nature. This is especially true for mortgages with a progress draw. Because the house hasn’t been built yet, the lender is taking on greater risk.
They could lose a lot of money if something goes wrong during the construction. If a borrower fails on their loan, the lender may be forced to repossess the property before attempting to sell a plot of land with a partially completed house on it.
Overall, building a home from the ground up is a dangerous proposition for both the borrower and the lender, and it is a project that should be thoroughly studied before any ground is broken. If you’re planning to build your ideal home, though, don’t let the prospect of incomplete projects put you off totally. If you are motivated enough, start building your house today.
The Bottom Line
At Lionsgate, we specialize in helping people get the extra cash they need, obtain funding for private mortgages, as well as for other real estate transactions. If you are looking to buy land in Canada, get a mortgage or apply for a loan, fill out the form below. Or, You can leave us a message and we will try to connect you with local lenders and sources that best meet your needs.
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