So you wanna buy a new home (Part 2)

*** The author of this blog, Ben Officer, is a licensed REALTOR® in the province of Alberta. The opinions expressed within this blog are those of the author and are simply that, opinions. The views expressed in this blog are not intended to advise you, as your needs may differ depending on your particular situation. The information provided in this blog is not guaranteed to be accurate and is subject to change at any time. For legal advice/information, please consult a lawyer. For mortgage advice/information, please contact a licensed Mortgage Associate. For tax advice/information, please consult an accountant. For investment advice/information, please contact a financial advisor. *** Blog Disclaimer - The information contained within this blog and posted by the author is believed to be true but cannot be guaranteed to be so. The author of this blog takes absolutely no responsibility for the comments posted by third parties on this blog.

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Tuesday, September 15, 2009

So you wanna buy a new home (Part 2) – The draw mortgage.

by Ben Officer on Tue, Sep, 15, 2009 06:10 PM

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Its exciting to plan for and execute the new home purchase. You are choosing the builder, the lot, the style, and all the little details like flooring etc… True choice.

Now, you ask yourself how do I get financing for something that doesn’t exist yet? Good question.

You have to either pay cash (I wish I could….) or get financing through your Mortgage Broker or Lending Institution. To qualify you need at least a 5% down-payment and a total cost for the amount to be financed. This could include the lot, the home, and any extras that are going into the home.

You are going to need the builder to make schedule of costs and a time-line because the builder will need to get the financing in stages. This is so he/she can pay for the lot and to pay the sub-contractors who are working to build the home.

Hence the name “draw” mortgage, as I call it. They draw on it, as they complete the home.

You will have to work closely with your Mortgage Broker/Lender to ensure that they know what is happening and that they are ready and able to forward the funds when they are needed.

I have asked Natalie Wellings, a licensed Mortgage Broker with Mortgage Success to comment on this post to fill it in some more, from her perspective.

Ben

Comments

by Natalie Wellings on Wed, Sep, 16, 2009 02:28 PM

Constructing a home can often be a confusing process. Here is some general information regarding the process. If you require further information please fee free to contact me directly:

Natalie Wellings, Licensed Mortgage Associate, Mortgage Success
P: 780-722-6287
natalie@youredmontonmortgage.com
www.youredmontonmortgage.com

CMHC has an improvement program that cover construction for a new home or home improvements on an existing property. Funds are advanced in draws or stages of construction.
This product can be used for different scenarios such as:
1.The borrower already owns the land and wants to build a property on the existing lot
2.Self-built home: the ownership of the property is in the name of the borrower who does the work or contracts with various subcontractors to build or renovate the property.
3.Homebuilder Pre-sold: the builder own the property (has title) during the construction process

The borrower must have a minimum of 5% down payment from their own resources. In addition, the borrower must have a minimum 1.5% of the value for closing costs. Note: for self build projects the borrower must have significant additional resources to allow for cost overruns. It’s also very important that the borrower has sufficient resources to cover construction costs up until the lender releases the first draw (funds). If the house is being built by a builder the borrower may have to provide proof to the lender that the Builder/Contractor does not require payment until the first draw is released.

Documentation requirements:
a)If being built by a residential builder:
-Signed Purchase and Sale agreement
-Offer to Purchase for lot or proof of existing ownership
-Construction Specs or Plans
b)If being built by a Contractor or Self Built:
-Signed Construction Contract including cost estimates (contractor)
-List of cost estimates from various contractors with a completed cost worksheet (self build)
-Offer to Purchase for lot or proof of existing ownership
-Construction Specs of Plans

Additional information:
-CMHC allows for a maximum of 4 progress advances (but different lending institutions can have different internal guidelines)
-While the lending institution and CMHC do not charge per advance, there are additional legal fees for each advance so speak to your lawyer regarding costs prior to starting construction!

Advances (draws) typically follow this schedule:
1st Advance: construction is at least 35% complete
2nd Advance: construction is at least 65% complete
3rd Advance: construction is at least 97% complete
http://www.cmhc-schl.gc.ca/en/hoficlincl/moloin/hopr/upload/CMHC-Improvement.pdf

The above information is believed to be true and accurate at the time of posting but is not guaranteed to be so and is subject to change at any time.

Edmonton, St Albert, & Area RE/MAX Real Estate Professional

Ben Officer, CD REALTOR®

So you wanna buy a new home (Part 2) – The draw mortgage.

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