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Do you want to build your ideal home? Not everyone wants to buy a pre-owned home. Some folks would rather have a completely new house built. If you’re wondering if you can get a mortgage to build a house, the answer is yes!
What exactly is a construction mortgage?
A construction mortgage BC allows you to draw down on the entire loan amount at predetermined stages of homebuilding. Allow us to clarify.
Construction loans are advanced on a progress-advance basis. The total money you need to borrow to finish your construction is handed to you in stages – sometimes known as “draws” – when you accomplish various levels of completion.
If you already own the land you wish to construct, you can get a first advance called an equity take-out. A first advance is provided to assist you with acquiring a vacant lot if you have not yet purchased the land.
A construction mortgage is a form of mortgage used to finance the construction of a home and needs typically just interest payments throughout the construction period. During the construction phase, the money loaned is advanced as construction develops. When the construction phase is completed, the loan amount becomes due, and the loan becomes a conventional mortgage.
IMPORTANT TAKEAWAYS
- A construction mortgage is a loan used to pay for constructing a new home, converting the loan to a conventional mortgage.
- Most of these loans are interest-only during development and will disburse money to the borrower in increments as the structure proceeds.
- Standalone construction mortgages and construction-to-permanent mortgages are the two most common types of construction mortgages.
- The former is frequently only available for a one-year term, while the latter will convert to a conventional mortgage once the house is constructed.
How Does a Construction Loan Work?
A construction-to-permanent construction loan in BC is frequently used to finance the construction of a new home. This financing option consists of two parts: a loan to cover building costs and a mortgage on the finished home.
Building mortgages may be sought as a strategy to ensure that most, if not
all, construction expenditures are covered on schedule, hence avoiding delays in the home’s completion. It is likely that unanticipated costs will occur, raising the entire cost of construction.
Lenders may provide various choices to make construction mortgages more appealing to borrowers. This could include interest-only payments throughout the construction phase and fixed interest rates once construction begins for construction-to-permanent loans.
Standalone Construction Loans vs. Construction-to-Permanent Loans
If the borrower does not obtain a construction-to-permanent loan, they may use a standalone construction loan, which usually has a maximum term of one year. A construction mortgage may require a lower down payment. Cannot lock in the interest rate on a standalone construction mortgage. The base interest rate may also be higher than that of a construction-to-permanent loan.
Important: If interest rates fluctuate during construction, it may require the borrower to make more outstanding payments.
The borrower would have to file for a second mortgage to pay off the construction mortgage obligation, which would become due after completion. During the construction of the new home, the borrower can sell their previous home and live in a rental or another type of accommodation. This would allow them to use the equity from the sale of their prior home to cover any costs incurred following the building of the new house, leaving only the construction mortgage outstanding.
Particular Considerations Construction Mortgage BC
The borrower’s obligations, assets, and income are required when applying for a construction loan. The borrower must also have a signed purchase or construction contract with the builder or construction company to qualify for a construction loan. Details such as the start and estimated completion dates and the entire contract value, including construction and, if relevant, the cost of land, must be included in the agreement.
The Important Differences Between Construction Loans And Mortgages
- Homebuilding loans are one-year contracts that are typically renewed. On the other hand, Mortgages come in a variety of lengths ranging from 5 to 30 years.
- Most construction loans do not penalize you for repaying the sum early. These penalties will differ from one lender to the next.
- Construction loans only charge interest on the loan amount used during construction. If the entire amount is not utilized, the borrower is not required to pay interest as the whole amount. Mortgages charge borrowers interest on the whole loan amount.
- Construction loans might help you get the money you need upfront to buy the land you want to build on. Land acquisitions are typically not serviced by mortgages.
- Any remaining building costs might be paid off by obtaining a mortgage on the completed home. The length of your mortgage will vary based on your interest rate and monthly payments, but it will typically last 10 to 30 years.
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