Buying a home for you and your family can be an exciting time. A construction mortgage can allow you to finance the purchase and construction of your new home. Being able to construct a brand new property gives you the freedom to design your ideal home and choose exactly how you want it to be built. Unlike a traditional mortgage a construction mortgage is drawn down in stages. As each stage of the construction is completed the lender will draw down additional portions of the total loan amount that you use to pay the construction costs.
While regular mortgages are given in a lump sum for a home purchase a construction mortgage is given, or drawn, based on the stage of construction. As each stage is met and verified by an inspector the lender will release a portion of the total mortgage amount. While the specifics can vary depending on the lender the draw schedule for a construction mortgage will look like:
There are several advantages that come with having a construction mortgage:
Design Choice: The biggest advantage of a construction mortgage is that it allows you the greatest input in designing your new home. Having the freedom to design your dream home can be beneficial for you and your family.
Construction Options: A construction mortgage gives you the option to choose between who you want to build your home and how you want it built, which gives you the freedom to choose a solution that is the right fit for you.
Location: Being able to build your new home on your own plot of land gives you the ability to take advantage of land that is available to you. Similarly, being able to build your home in a new residentially zoned area can also give you the freedom to choose where you move to.
Despite the advantages of a construction mortgage there are factors that you need to consider before you proceed:
Payment: Before you get a construction mortgage you will want to assess its affordability and if the choice is right for you. While the building is being constructed you will be responsible for ensuring that builders and the construction company are paid on time which will require cash to bridge the gap between the mortgage draws.
Construction: With a construction mortgage you need to navigate the construction process which includes the design choices of the home, negotiating with contractors, and being comfortable with the construction timeline.
Delays and Unforeseen Costs: With a construction mortgage there is the possibility of facing construction delays and additional or unexpected costs which can impact your plans. Accounting for delays and unforeseen costs in your plans can be helpful in proper planning and managing the stress of the situation.
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Because the burden to prove eligibility is greater on self-employed individuals, it pays to be well prepared before applying for a loan. The following should be considered before going into apply for a Self-Employed Mortgage:
How to get a Construction Mortgage
Similar to a regular mortgage a construction mortgage has an application process. When you apply the lender will look at your finances which includes your debt situation, your income and job security, and other assets you might have. The lender will be looking to see if you can afford the home and will be able to consistently make payments on the construction mortgage.
To qualify for a construction mortgage the lender will want to see a signed contract between you and the builder or developer. The contract will need to detail the total contract amount, the cost of construction and the land, and the construction start and end dates. The lender will be looking to see if the contract and schedule are realistic and achievable. The lender will also need to know if you already own the land or not, how much money you have on hand to cover the gaps between the mortgage draws. Once your construction mortgage loan amount is decided you will not be able to borrow additional amounts so it is important to have a proper contract and sufficient funds. If you have construction experience and want to do the work of the general contractor yourself you will need to provide proof to the lender to assure them.
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A construction mortgage is a type of mortgage used to finance the building of a home. The loan amount is drawn out in stages based on how much of the construction has been completed. As each phase of construction is completed and verified by an inspector the lender will release additional portions of the mortgage amount.
What is the difference between a construction mortgage and a construction loan?
A construction mortgage is an agreement between you and the lender to finance the purchase of your home, including the construction of the property, and is paid back over time like a mortgage. A construction loan is a short term agreement typically for a year that is used for land purchases and early construction work.
What credit score do you need for a construction mortgage?
Each lender will have their own requirements for a construction mortgage but typically a credit score in the high 600s is considered the minimum. The higher your credit score the less risky you are to a lender and the lower the mortgage rate you will qualify for. Similarly, a large down payment can help to lower the mortgage rate.
Can I get a construction mortgage for a custom-built home?
Yes, construction mortgages are ideal for custom builds. They provide funding in phases, aligned with the progress of your home construction, ensuring that you can cover expenses at each stage.
What do I need to qualify for a construction mortgage?
To qualify, you typically need a detailed construction plan, a budget, proof of income, and good credit. Lenders may also require a significant down payment due to the increased risks associated with construction projects.
