With interest rates as low as they are today, home buyers are finding that they have more and more options available to them when they are looking to find their dream home. Between condo projects, town-homes, duplexes, bi-levels, acreages, and family homes, the average home buyer is in a unique position to be picky about exactly what features come with their properties. This characteristic is epitomized by the increasing availability of customized home solutions, in which a buyer can contract out the construction of a house that meets their exact design specifications.
While this option would normally be considered to be extremely costly, and somewhat unnecessary in light of a renovation, the availability of cheap mortgage financing in today’s economy is opening up this opportunity to more and more consumers. By then simply taking the time to understand what our financing options are for building a new home, a consumer can start planning around their new home construction goals.
By far, the easiest way for a buyer to finance a custom built home is through a program that allows the buyer to forward funds upon completion. These programs are generally run by larger manufacturers, which have the capacity to start a construction project without more than a deposit from the buyer. In general, a builder will require a buyer to put 5% of the final purchase value down upfront, and then they will begin the construction project.
This project will generally then take the course of a year to complete, and then the consumer will need to forward the remaining funds required (usually through a bank mortgage as long as you haven’t taken out any personal loans for bad credit) once the home is ready to be moved into. In pursuing this option, there are two main requirements to consider. Firstly, while it is that the customer doesn’t need to forward the mortgage funds for the home until the project is completed, the builder will usually require a letter from a bank assuring the customer that financing will be in place when it is needed.
This usually requires a special kind of mortgage pre-approval that allows the bank to hold their offered interest rate for an entire year before funds are actually forwarded. From there, the customer will also need to maintain their financial position over the course of the year during which the home is being constructed, because they need to still be able to qualify for the mortgage when funds are needed.
The second popular way for a new home buyer to finance the construction of a new property is to take direct control of the project through the use of a ‘draw’ or ‘builder’s’ mortgage. A draw mortgage refers to a product that allows a borrower to qualify for a full mortgage amount, but then only forwards the actual principle amount of the mortgage in installments, which are proportionate to the latest stage of construction that has been finished. While this process is a little bit more involved than the payment-upon-completion method, it allows a buyer a greater degree of control over their project.
Through a draw mortgage, the buyer with experience building homes can take advantage of their own expertise to participate directly in the construction, and therefore save some money. Alternatively, it also allows both the buyer and the bank to control the amount of risk that they are exposed to with regards to the financed debt, because funds are only being forwarded a bit at a time, and upon completion of a bank inspection at each construction phase. This means that both the buyer and the bank are able to keep tabs on the quality of the construction project to make sure that everything is being done up to code.
Upon determining which financing option they want to proceed with, a new home buyer can start to move on to the planning stages of their construction project. Especially when looking at the draw mortgage option, this planning stage becomes critical to ensure that there are no set-backs interfere with the bank’s ability to continue forwarding funds to the customer in the event of a delay.