Home builder mortgage is a real alternative to buying a home from someone who made it perfect to their, not YOUR taste. Here are all the stages of the process and pitfalls you may face — and of course, the way to avoid them.
We all want something different. If you are looking for a house, it can be so time-consuming to find the best one for you. You will have to drive around, look at auctions and listings online, compare dozens of options that all will still be… well, not exactly the picture that you have in your head. Even if you finally find what you like, it might be too late because someone else beat you to it.
Building your own home is an easier option than buying one. You can hire a professional, and the whole process will be a one-stop-shop: you just have to pick the area, the house size, and its style. Or — with a different approach — you can design it from scratch and make it truly unique.
What do You Need BEFORE You Try to Get a Home Builder Mortgage
Aside from willpower to cope with all the paperwork — you need a few small, but notable things.
Land
Your future home has to BE somewhere, right? You can’t just start construction on someone else’s or a rented land plot. Unfortunately, you can’t secure the loan with the same home builder mortgage loan you get to build a house. If you don’t have the cash to buy it — you’ll need an extra loan.
Loan for land purchase in Canada is a simple, yet hard to get thing:
- You’ll need a good credit score, possibly above average;
- You’ll need a large deposit, up to 30% of the land price;
- No land in Canada is free, so it will have taxes and other fees.
If you’re building your home in Canada, you’ll still need to register your land with the government. You can’t just buy land, build a house on it, live there for half a year, and then register it.
Tips to Choose the Perfect Land Plot
You don’t want to buy a piece of land, get a loan for it, and in a month or so find out that commuting to work from it is torture, right? Here are the tips that may help you:
- Check the infrastructure. What are the roads like? Are there any grocery stores, schools, gas stations?
- Think about transportation. You need to get there anyway at some point, so don’t waste your time on long commutes.
- Which way can you build a house on it? Do you want to face south or north when you’re in the backyard? Is it better to watch the sunset or sunrise?
- Check the wind maps, weather maps, historical data on air pollution in the area.
Also — zoom out on the Google map. Maybe there’s a waste incineration site in a few miles from your future home — and the wind is blowing directly from it. Research is especially important if you’re buying it for an unreasonably low price.
Building Permit
This is another essential document. Technically, you could get it after you have your land and have built a foundation for your house, but…
You can’t just start construction, even if you have the land or paid for it in full. You need to register your construction job with the zoning authority. This is not a hard thing to do, but you can get fined if it’s not done on time.
You’ll need to make sure that your building is in accordance with the code of the city (or town, or village). If you build illegally, for example by using illegal material, or constructing in a dangerous area, you risk getting fined and facing other problems.
House Blueprint
There is one more document that you need to know about: house blueprint.
The house draft plan is a detailed drawing of the house that has been approved by zoning authority. It’s a detailed 3D plan of the house, developed after the final building permit has been issued by the authority.
It helps police to identify any violation or illegal construction on your home building project.
You can’t get this drawing without having an actual construction job on your hands.
These are just some of the things that are no-brainers when it comes to building your home. You can’t just skip them without thinking about the consequences. Now — to practice.
Documents You Need for a Home Builder Loan
You will need to fill out an application form at the local bank, where you’re going to be getting your home builder mortgage. You’ll need to show them these documents:
- A signed master contract from the architect or home builder that confirms that you were approved for a construction job;
- A letter of intent from the seller confirming that they are ready to sell their property;
- A signed declaration that you have paid for the land;
- Proof of identity of all members of your family who are living in your house.
After you’re done with this, you’ll get a response from the bank. They will either refuse to loan or approve it. You have to wait for this amount of time before moving on with the next step in building your home.
Minimal Credit Score for Home Builder Loan
The short answer is — you need at least 600 to 680. But the long answer is… it depends.
The credit score that you are going to need for a home builder mortgage loan is based on your income, credit history, debt level, employment status, and other factors. Your bank will review this information with you before making a decision on whether they’re willing to give you this loan at all.
Home Builder Loan Terms
The size of the loan and your payments can vary based on how much you make, your debts, and your budget. Home builder mortgage loans are usually offered with the following terms:
- Fixed payments of at least $1,000 per month;
- Interest rates can be adjusted to suit your needs;
- The period of the loan is usually between 5 and 10 years.
Depending on what you’re borrowing for, your monthly payments won’t vary that much in the long-run. The biggest difference will be the interest rate. The home builder mortgage loan interest rates are usually slightly higher than the average mortgage loan rates.
How Much Can You Get?
The maximum amount that you can borrow for this loan depends on the number of members in your family, your employment status, your income calculation, your payment history, and other factors.
It’s common to borrow up to $100,000 with this loan. The average loan size is around $60,000–$70,000. The smaller the loan amount is — the better for you as a debtor.
Check with your local bank for more details about their mortgage loans.
What’s a Good Downpayment?
Usually, a downpayment of at least 20% is required. Most of the time, it’s even more than that. Practically, you can expect to be required to pay AT LEAST a 30% down payment. Some banks will have tighter/looser requirements on this down payment amount, but in general — it’s a bigger risk for the bank, and you have to pay for it.
No Down Payment for Construction Mortgage?
Yes, you CAN apply for a no-down-payment mortgage to build your own home. However, there’s a pretty good chance that it won’t work. Your loan application may be declined based on the lack of down payment if your income is too low.
Some banks may even agree to loan you the money without any down payment at all. There’s a catch:
- You will be charged with a higher interest rate and bigger monthly payments. And we mean HIGHER;
- The credit check process will be more thorough and laborious;
- You won’t be able to use the 20% tax credit on your purchases.
It’s not the best idea, and your chances for success are quite small (which is, considering the monstrous interest rate you’d get with zero downpayments, a good thing).
Main Difference Between the Traditional Mortgage and Home Builder Mortgage
The biggest difference you need to understand here is that you significantly increase the risks for the lender by hiring a third party — a construction company. Even if you plan on building your home with your own hands, it’s still the third part of the process.
With a traditional mortgage — the bank gets just two risk factors:
- You won’t pay for your home;
- Something will happen with the bank in this period.
With a home builder mortgage — the number of risk factors goes up:
- You won’t pay for your home construction;
- The CONSTRUCTION COMPANY will fail, go bankrupt, sabotage your project or drag out deadlines (or YOU will mess up the whole thing yourself);
- Something will happen with the bank.
That’s where all the problems come from. You need to think not just about paying, but about the construction company (or your own construction skills) as well.
How to Make the Construction Company Look Good from the Bank’s POV
Since you’re the one who’s going to pay both the construction company AND the bank (in interest rates), determining all the risks is also your task. Choosing the right construction company starts with research. A decent, trustworthy company that you CAN trust with your home builder loan, should:
- Have a history of successful projects;
- Have a variety of satisfied customers (and their reviews);
- Have good customer service;
- Be located in an area where you want to live;
- Have competitive prices for its services;
- Be registered officially;
- Have all the necessary certification.
A decent construction company can do (and prove!) all these things with no problems.
However, there are some factors that put the bank off:
- The quality of their service is known to be not so good;
- The timeframes are too short;
- They make a lot of mistakes;
- This is a NEW company with little experience.
If a bank sees a lot of these red flags — that’s a no-go for them because the bank needs to make money on your project. There ARE banks that will work with two or three red flags, but if you see more than 3 — please, get another construction company. The same goes for yourself: If you see ANY red flag in the company that you’re working with, get out!
Two Main Types of Home Builder Mortgages
You have two options:
- Completion Mortgage (buying a home that is almost ready);
- Progress Draw Mortgage (buying a land, hiring a construction company, building your home from scratch, while receiving money in multiple “draws”, each for a new construction progress stage.
Completion Mortgage Key Points
You — again — buy an almost-ready house that you can move in. What’s the difference with the traditional mortgage? Simple: you don’t buy a house that you can move in TODAY, you buy a house that should be COMPLETED before you can move in. You actually buy it in the final construction stage, BUT it’s not ready yet. Traditionally, it takes about 4 months to finalize the construction (they’re required to do it in that time).
Mortgage on a New Home Builder
You don’t buy an empty land plot — you buy land from someone who ALREADY started building their home on this land, but for some reason — decided to drop the cause. Or you know, in 90% of the case — you buy it from a developer company.
Even private sellers are not always an automated red flag: maybe they ran out of money, maybe they’re facing some unexpected financial problems, maybe they decided to move to France. There’s a ton of possible reasons.
The process itself includes extra steps because you have to deal with the previous landowner. As soon as you get your mortgage, you can ask the seller when they will make a deal.
The process of buying and selling in Canada is a long and complicated one:
- The seller puts their property on the market;
- You send them an offer;
- They accept or decline the offer;
- You agree on a price;
- You pay the bank the first installment of the loan;
- You sign a contract for sale with the seller, who is lending you their property;
- You start building your home.
Once you’ve managed to get everything together, you’ll be able to move on towards getting your dream house.
Important: with a completion mortgage, the terms won’t be finalized until the 30 days guaranteed period before you can actually take possession of the house. It gives you enough wiggle room to do everything you can to decrease the interest rate or get other improvements in the mortgage terms.
What is a Progress Draw Mortgage
The progress payment is also called a draw. If you have a traditional mortgage — the mortgage company provides you with the construction loan and allows you to make your payments in installments. This is one of those installments: A piece of the whole sum for completing a stage on your project after the bank approves it.
Stages of Progress Draw Mortgage
The payments are typically divided into 4 parts:
Foundation Draw.
This is the part you get when you:
- Get possession of the land;
- Start building the house. Or the construction company starts its work.
It’s important not to mess things up at this point: you won’t get a single cent of the foundation draw IF your land is not entirely yours at this point, but you still pay for it to the lender. That’s why it’s crucial to think about the land ahead: you’ll have to pay for all the construction out of your pocket while you’ll STILL be paying the land mortgage. If things go fine, however, and you own the land — you’ll get this draw as soon as the construction begins.
Lock-Up Draw
This is what you get when your home is half-ready. At this point, you will most likely have the foundation, walls, ceiling, and roof in place. It’s called “lock-up” draw exactly because you have the majority of the house done and ready, so you can install doors, windows, and lock the house when you leave it (you won’t need to prove it to the bank and walk away while they’re watching, it’s just a code name for the construction stage). You WILL have to show that it’s possible to the inspector, though.
Drywall Draw
At this point, your home is supposed to be almost ready. Everything from the outside is in place, you have tiles on the roof and ventilation system ready, time for communications. Electric wires, heating, plumbing, all the “boring”, but essential for your future comfort things. Again, you won’t need to show the bank how good your plumbing is. It just means that you’ll receive the money when the inner communications work will start.
Completion draw
The last draw in the progress. You get it when, well, your house is ready. You have all the major things in place and can start with the furniture (the bank doesn’t care about the furniture, though). You can even tell the inspector that it’s ALMOST ready and show them that just a couple of wires need to be hidden.
What Home Builder Mortgage Inspector Will Look At?
The inspector will definitely want to see the main structure of your home (walls, ceiling, doors, windows, roof), the infrastructure (electrical wires, water pipes), and ventilation. But most importantly — they will be looking at the PLUMBING. Yes, anecdotally, it’s the most common issue. People often underestimate the importance of plumbing, but it’s a major risk for the bank: if the plumbing is not installed properly, water damage can destroy the whole project. You can tell the inspector that your shower is not installed yet (not that you had it planned anyway) but if the plumbing is not there at all — then that’s a big problem.
Having a progress draw mortgage can be a huge benefit: you’ll get the money to finish the construction even before you’ll be able to move in. That allows you to control the speed of your project and makes it easier for you to save up for your home since you don’t have to pay such big monthly installments. The only downside is that if something goes wrong — you lose money. You can’t fix plumbing or hide poor quality work without losing your progression draw.
Final Word on Home Builder Mortgage
With all the mortgages available to homeowners, it’s hard to choose one. You have to think about your life in the long run in order to choose the right one for you. The home builder mortgage has its flaws but it works in many cases. It’s a great tool when you want to build your dream home, but don’t have the money on time. All in all, nobody will be able to tell you which is better for you unless they know exactly what you are trying to achieve.