Construction Mortgages
Construction Mortgages
A construction loan is typically a short-term loan (usually less than 3 years) that is intended to finance the construction of your real estate asset. Construction loans tend to have higher interest rates and are secured by the property they are meant to finance. Money borrowed through a construction loan is divided into advances and distributed according to a schedule of milestones (draw schedule). The cash flow generated by the completion of the project is then used as permanent financing to pay off the construction loan.
Whether you're a first-time homebuyer or an experienced realty investor, a construction loan can be as unique as the project you're financing. Some projects that are good candidates for a construction loan include:
construction & Renovations
- A new home purchase where the builder requires payment in installments as the home is being completed.
- Building a home on a lot you already own.
New Home Construction
- A purchase of an existing home that requires renovation.
- Renovations to your current home as part of a mortgage refinance that includes your existing mortgage and construction costs.
Home Renovations
How much to borrow?
- To help you figure out how much to borrow, you'll first want to talk with your builder to decide how much your new home construction will cost.
- Like any mortgage, you want to ensure your monthly payments fit within your budget, and during construction, you may have added costs. Construction loans only cover the cost of land and construction, not living expenses while your house is being built.
- Many people, for example, plan to use the proceeds from the sale of their current home to help finance the construction of their new home. This allows them to make a larger down payment and reduce the size of their loan. Remember to factor in the cost of rent while your new home is being built if required.
Documents Required
- Your basic debt, income and asset information
- A signed construction or purchase contract with your builder or developer. The contract will detail certain aspects that will impact your loan, such as: contract amount (including construction and cost of land), and the construction start and completion dates.
- The builder will need to provide financial statements as well as current license and insurance documentation.
- Borrowers in search of a builder's mortgage, meaning those who plan to self-build and/or act as their own general contractor, will need to demonstrate that they are an experienced, licensed, and insured builder.
To get qualified and apply you will need:
Down Payment
- Sales price is calculated based on the cost of the land/lot plus the cost of construction.
- If the property has been owned for more than 12 months, the fair market value may be used to calculate total purchase price.
- The end or "as constructed value" of the home may be greater than the sales price calculated for down payment.
- Any funds used towards construction such as architectural plans, building permits, cash used to purchase the lot, etc. may be included as part of the down payment – talk with a Mortgage Loan Officer for more details.
A construction mortgage requires 20% of the sales price as down payment or 20% equity in the transaction, where:
Draw Schedule
- Once approved, you will use your construction loan on a draw schedule. A construction loan draw schedule is a detailed payment plan for the home construction project and details how the lender will disburse funds as the project progresses. Once approved and ready to break ground, funds will be distributed based on the draw schedule agreed upon by you and the builder.
- "Draws" are payable to the borrower and the builder and can only be used for the building of the home, including flooring, lighting and other permanent fixtures.
- An inspection to verify work completed will be done at each draw request and title updates will be completed multiple times during construction. You can talk to your Construction Loan Servicer for more information.
