When we shop for a home, we can spend months looking for the perfect home without finding anything. Maybe the housing costs in our area are too high, or maybe we are just not happy. Some buyers will buy a house that looks great outside, and will later realize that the electrician has done a poor job indoors, that lighting is bad, that there are leaks water through the roof or there are odd smells coming from the basement. For others, their goal is to buy land and build their own home. Despite the long and hard process, it surely solves many problems of discontent.
So, if you are a buyer interested in undertaking such a project, know that there are ways to achieve it. Before doing anything, it is important to understand that a mortgage for the construction of a home will require a little more money and effort on your part than a traditional mortgage for an existing home. On the other hand, if you manage to complete your project, you will have your own house as you envision it. So, for anyone looking to achieve their goals.
Purchase of vacant land
When you plan to build your new home from scratch, you must first buy a vacant lot. You could even buy land with an existing home and demolish it to build a new one. If you buy an empty lot, you may need to get a separate loan to finance the lot.
However, you probably will not have to obtain a separate mortgage if you buy the land through a contractor; We'll talk about it again later. As with most loans, to get a loan for a vacant lot, you will need a favorable credit rating and a decent income. Be aware that you will have to make a large deposit, sometimes between 25% and 35%. However, you could obtain a loan from a private lender by opening a personal line of credit or opening a home equity line of credit (LCV) through another property you already own.
If you are considering buying a vacant lot, it is extremely important that you consider all the factors. This involves doing research in the area and making sure you can get permission from the local municipality for construction. The manner in which property is zoned, to whom it previously belonged, and how it is partitioned will be issues that need to be addressed. You will need to consider both the costs and the environmental concerns related to the construction of the drinking water system, a sewage system and other such services. These are just the initial elements to consider if you are buying a vacant lot. Then comes the fun part, the construction of the house.
Buying from a contractor
Buying a home already under construction from a contractor is an option for those who wish to buy a new home, if you do not want to go through the planning and construction yourself. This is common when a new construction site or community is being built. For the most part, you can have a say in the appearance of the house, but you will do a lot less hard work. You will have responsibilities, such as choosing the lot you want to buy, layout and finishes, and defining any additions to be installed.
Just like buying a vacant lot, choosing a skilled contractor is also important for your finances and the future of your new home. Make sure your builder has a good reputation for building quality homes. Any legal contractor will also give you a guarantee, usually one year, for his work and construction materials used in the construction of your home. Once you get the guarantee, read it carefully to find out exactly what parts of your house are covered. And, with this warranty, most contractors will include an owner's manual so that you can do the basic maintenance of your new home.
How does a mortgage on house construction work?
As mentioned above, a home building mortgage, also known as a construction legal mortgage, means that you will get a loan to build your own home, rather than mortgaging an existing home. Remember, in many cases, building a house from scratch can be more expensive once you've taken into account the cost of building materials and the contractors and subcontractors that you are likely to hire. If you are already an experienced contractor, you can still design the house and start building yourself, but it is likely that you will need a team to help you. That said, you can choose between two types of mortgages to finance the construction of your home. In Canada, you can choose the mortgage option or combine both, depending on the policy of your lender and the province or territory in which you live.
Mortgage with progressive advances
The first mortgage option for residential construction projects is known as a progressive loan. This is where the buyer of a home will receive the funds from his lender in several times throughout the various stages of construction, until the project is completed or almost completed. During each of these phases, the lender will send a building inspector to the property to review the progress of the building and ensure that everything goes as planned. After each visit, the inspector will submit a progress report to the lender, who will allocate more funds accordingly. If the inspector determines that the construction is not up to the task, the lender may be forced to withdraw its funding. Here's what you can expect from the four phases of the progressive loan:
- Phase 1: The advance for the foundation is received when the land is purchased and construction of the house has begun. However, this advance will only be granted when the land has little or no mortgage. If you mortgage the land, you will receive your first advance only about 30 to 50% of the construction of the house. Thus, you will have to assume the costs associated with completing the first 30-50% of your home.
- Phase 2: The key advance in the door will be received when the house will be completed at around 30-50%. This means that the foundations are laid and the windows and doors are installed. The house can therefore be locked. This will be your first advance if the land you are building on is mortgaged.
- Phase 3: The advance of the drywall will be received when the house is completed at approximately 65-70%, with the heating system installed and the drywall ready to be painted.
- Phase 4: This advance will be received when the house is completely finished or about to be completed (90-100%). Electricity and plumbing should work, all permits and contracts must be signed and the house habitable. As mentioned above, the purchase of a vacant lot is a considerable expense. Take this expense into consideration before choosing a progressive advance mortgage. You will also be charged a separate fee each time the inspector reports to review the progress of the work.
The completion mortgage
When you have a home loan completed, it means that you bought the house through a new builder and that the house is finished, or at least you are ready to move. In this case, the builder should not be compensated until you take possession of the house. Since your mortgage will not be finalized until 30 days before your official takeover of the house, some lenders will require that you pay a down payment on the house. However, unlike the down payment of an existing home, your lender should allow you to pay it in installments. Once the house is completed, which should take about 4 months (most lenders who grant completion mortgages need the house to be completed within 120 days), the completion loan itself will the same should simply be necessary to repay the remaining balance to the builder.
Completion mortgages may be of interest to many buyers as the terms of the mortgage will only be official 30 days before the buyer takes possession of the house. This means that before the start of the 30-day period, homebuyers are allowed to make certain changes to their mortgage loan, for example to increase it to fund the additional improvements desired during construction. However, before finalizing the mortgage, it is important that the buyer in question not make any significant changes to his life or credit, such as changing jobs, obtaining another large loan. Or other. Deviating from the lender's instructions could result in revocation of the mortgage.
Additional information to consider
First, before deciding to purchase one of these types of mortgages and build your own home, it is essential to know that these options may not be available in all provinces and territories in Canada. Many lenders in Quebec and New Brunswick, for example, do not offer a progressive advance mortgage.
Before you apply to your lender, you must also prepare thoroughly, for example by drawing up your construction plans, as well as having a contract for construction and associated costs. If you are building yourself, you will need a quote for building materials and labor. For the land you purchase, you will need to provide the municipality's authorization along with a copy of the deed of sale and proof of purchase purchase of the property.
Another element to consider would be the way you plan to build the house, ie are appearance and the different levels you want, if any. It may be tempting to design your home to suit your personal taste, especially if you are not buying a semi-finished home from a contractor, but you may need to resell it.
Even if it's been decades, even if you give it to your children, the house will return to the market. That's why it's good to think of what other people would like to see in a house, so that it can be sold later. If the house is very big and expensive, for example, you will again limit the number of potential buyers who could afford it. If you decide to paint the entire house in bright pink, not everyone will like it. Then, those who might be interested will have to consider the cost to repaint it.
What about the most important consideration? Keep an eye on the progress of the work and the money you invest in it. Prepare financially for any unforeseen events that may lead to construction stoppage, as well as additional costs or repairs. Let's just assume that when you build your own house from scratch, everything can go wrong. It is therefore preferable to have a parallel strategy, even if it involves drawing on your savings. In fact, it is recommended to have at least 15% of the total cost of the house in case something would put the project in danger.
The mortgage process of construction
The mortgage process for building a new home is more complicated and often more expensive than a traditional mortgage for an existing home. Not only does the construction of the house take time and effort, but most lenders require more insurance before you start lending money. In most cases, a high credit rating and a decent income will not be enough. Potential homeowners must provide their lender with proof that the construction of their home will be completed within a certain period. Banks, in particular, will also want to verify that the contractor or builder in question is certified and has a track record of well-constructed housing projects. If you are considering yourself as an entrepreneur, the lender may be skeptical until you can give them reason to believe that you are qualified enough to undertake a project of this magnitude. This is particularly true for progressive advance mortgages. As the house is not built yet, the lender runs more risk. If something went wrong during construction, they could potentially lose a lot of money. If the borrower is in default of payment on his loan, the lender may have to repossess the property and try to belly the land with a partially completed home.
In addition, when it comes to building a house, you will have to offer a larger down payment than a traditional mortgage, usually between 25 and 30%. So, if you're not completely sure you have the financial resources to take on the responsibility of building your own home, it's best if you take the time to think and save a bit more. If you think about it, building a house from scratch is risky for both the borrower and the lender. This is a project for which you have to think before you start. However, if you want to build the house of your dreams, do not let the idea of unfinished projects discourage you. If you are motivated enough and take the time to develop a reasonable homeownership strategy, there is no reason you can not build the perfect home.