A construction mortgage is required when you are looking to build a house with a smaller private builder. You are looking to build on the land that you own or on the land you are looking to buy. If the builder informs you that you need to apply for a construction mortgage, this means they are looking to receive payments for the work completed as the construction goes on. It is done in stages or advances.
Typically there are 4 advances. Sometimes 5, if you are also buying the land and need financing to pay for the land.
Construction mortgage is a complex mortgage. Multiple parties are always involved in the process: the builder, bank, real estate lawyer, the customer, etc. The deadlines are tight. If you are trying to arrange for a construction mortgage on your own through your branch, things can get overwhelming. By working with knowledgeable mortgage broker who is excellent at communicating with all the parties and who is always on top of the process, you will save yourself a lot of unnecessary stress and headache. Our services are free.
Construction mortgage is not required, if you are looking to build a house with a larger established builder (for instance, Jayman, Trico Homes, Bay West Homes etc.). These builders will ask for a purchase deposit when signing the purchase contract with them. The deposit typically ranges from 5 to 10% depending on the builder. The deposit is treated as a your down payment by the banks/trust when arranging mortgage financing. The builder will be looking for the rest on possession date when the property is 100% complete. I do a lot of new home mortgages and they are similar to arranging for a mortgage on a resale home purchase.
Custom homes offer endless options! All add up to the purchase price. Prior to entering into the purchase contract with the builder, it is a very good idea to consult a mortgage broker to determine what mortgage amount you could potentially be approved for. This way you will know what amount you should not exceed when discussing prices and options with the builder.
- Optional Advance prior to start of construction to finance the land. Typically no more than 65% of the land purchase price/or appraised value.
- Optional 15% advance at 15% complete – excavation and foundation complete
- 40% complete – Roof is on and the building is weather protected
- 65% complete – plumbing and wiring started, drywall complete, furnace installed, exterior wall cladding complete.
- 85% complete – Kitchen, bathroom completed. Doors have been hung
- 100% complete
Maximum 15 months construction period from the date of the first advance
Each draw of funds is advanced through a real estate lawyer. In Alberta, the lawyer is required to hold 10% of each advanced amount as lien hold back. After the property is 100% complete and there are no lien claims against the property, the 10% hold back gets released to the builder. The purpose of lien hold back is to ensure that all trades involved in construction got paid by the builder and there are no unsatisfied claims.