How Construction Mortgage Works For Building A Custom Made House
Not everyone wants to buy an existing house as it may not appeal to their tastes and preferences. So, to meet their personal standards and lifelong dreams they may decide to construct a custom-made home. If you are of the same opinion, you’re probably wondering if there’s a specific loan or mortgage for building a house. Well, there is, it’s called a construction mortgage and works a bit differently from regular mortgage financing.
What is a construction mortgage?
While some major banks provide loans for construction purposes, applying for them and obtaining them is a rigorous process. As a result, a majority of experts in the building and construction industry prefer private construction financing as it is fast, easy, and flexible. Unlike the bank’s income verification approach, private lenders grant this loan based on the end value of the project’s so-called equity lending.
In most cases, the construction loan is registered as a second mortgage behind a first mortgage. The amount of the loan calculated based on the final value of the property upon completion and typically can go up to 75% of the end value. When the construction loan is in second position, the amount would be calculated as 75% of end value minus the outstanding amount of the first mortgage.
Purpose and benefits
Construction mortgages are usually used at the time of construction or rehabilitating houses. Also, both the builders and the homeowners who want to rebuild their property can avail of this mortgage.
With a private construction loan, the money required to build the house is advanced to the homeowner as the construction progresses, and this is called a Progress Draw Mortgage. In general, the major banks release the money for each draw upon the completion of 35% , 60%, and 100%; while some private lenders are quite flexible in terms of advancing the loan and the number of draws to the extent that some of them will even advance the draw at a very early stage.
One of the best features of this type of loan is that it is interest only. The interest is calculated on a daily basis and deducted from each draw or an interest reserve fund. Other costs associated with this type of loan would be lender fees, legal fees, and broker fees that are payable upfront by the borrower.
How to avail of a construction mortgage?
Usually, mortgage brokers have access to private investors, lenders, as well as institutional lenders who provide various terms and conditions for construction loans depending on the size of projects. An expert mortgage broker can assist homeowners in finding the most reliable and flexible products that can be customized based on their needs.
At MassMortgageGroup.com we specialize in a variety of residential and commercial mortgages in Ontario. Our team consists of senior mortgage advisers that bring a decade of experience to the table. Another great benefit of working with us is that apart from our own funds, we also have access to a network of over fifty lenders specialized in financing private mortgages, various commercial mortgages, and construction financing for custom made houses and multi-unit development projects.