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Understand How Financing A New Build Is Different

Securing a mortgage on a new build is much different than financing an existing or pre-owned home.  It is important to understand how the extended timelines, process and options in financing may impact you, especially at a time where there is more job uncertainty. 

There are two ways to finance a new build through a builder:

Completion Mortgage

A completion mortgage means that you have purchased a home but do not take possession until the house is complete and all mortgage funds are paid on possession.  You write an offer to purchase for a conditional period (usually 2 weeks) so you can secure financing.  Once you have done that you usually pay an additional deposit totaling 5%.  Once the house is complete and ready for occupancy, you will require the remainder of your down payment and the funds from a mortgage to pay the builder the balance. 

Progress Draw Mortgage

A progress draw mortgage is where funds are advanced in stages (otherwise known as "draws") during construction.  Each stage has to pass inspection confirming percentage complete before the next payment is granted. There are usually three draws, but it can vary depending on the build and lender. With a draw mortgage you process your financing up front the same as with a completion.  Builders prefer this structure because it provides them with cash flow throughout a build, allowing them to carry more builds at one time. 

Usually you will be required to make interest only payments on the amount the lender has advanced throughout the build.  Some builders will offer to pay your interest payments until completion.  Once completed, the mortgage will be converted into a standard mortgage.  Lenders differ on their policies for your mortgage options at completion. 

Extended Possession Re-Qualification

Lenders' standard mortgage rates are a 120-day commitment.  For most purchases of pre-owned homes, possession dates will fall within that time period.  If a new build is a spec home with fast possession, you may also fall into that time frame.  

A typical build can take anywhere from 6 to 12 months (or more). In this case, you either secure a longer term interest rate commitment at a higher rate or you reset your rate every 120-days.  Either way, once you receive your possession letter (30 - 45 days prior to possession), your lender will generally confirm your mortgage qualification.  A lot can happen in a year and lenders want to make sure you can still afford your mortgage. It is common for them to request an updated credit report, pay stubs or other confirmation of your employment and income. They can also confirm the value of the property has remained the same.  This is particularly true for pre-sale condos or very lengthy builds of 18 months or more.  If value has dropped significantly, they can reduce your mortgage accordingly and require you to pay the difference to the builder.

If you are currently looking to buy a home and are worried for your job or even thinking of making a significant career change, building a new home may not be the best fit. Even if you are initially approved at the beginning of the build, a lender retains the right to cancel the financing on the property due to change in your employment or credit. This could result in losing your down payment and possibly being sued for not fulfilling the contract.

Therefore, if employment stability is a concern, you may want to consider a completed new build or a spec new build that can be completed within a short period of time. 

TIPS FOR BUYING A NEW BUILD:

Confirm value.  A Realtor can still help you on your builder purchase, as long as you involve them from the start.  This is so important as they can help you understand the sale price of existing homes that compare to the one you want to build.  Confirm you are paying a fair market price.

Think resale even when building.  It can be hard to visualize when you are looking at a pile of dirt, but the same things that impact resale on existing homes will impact resale on your completed home.

Get pre-approved. Even when buying a new build, talking to a Mortgage Advisor early on will help you understand your options and purchasing budget.

Budget for additional new build costs. Landscaping, fences, decks, and window coverings are just a few of the costly items that are generally not included.  GST is also charged on new construction homes. Keep these in mind when comparing to existing home prices.

Take time to research the builder. Does the builder have all the qualifications to meet your needs and expectations? Check out their show homes, talk to other clients about the builder's work, ask your Realtor about their reputation, look them up at the Better Business Bureau, and run a quick Google search for some reviews.

If you or someone you know is considering purchasing a new build, please contact me to discuss available financing options.