Builder Mortgage Types
Understanding New Construction Financing
There are four types of New Home Construction Financing situations:
1) Builder Assumption Mortgage
2) Completion Mortgage
3) Progress Draw Mortgage – Purchase from an established home builder
4) Progress Draw Construction Mortgage – Purchaser acting as their own general contractor
Each of these situations has a separate set of circumstances:
Builder Assumption Mortgage
This is where the purchaser buys a new construction home from an established builder and makes a deposit on the home at the time of purchase and the balance of the purchase price is paid on completion and possession of the new home. The builder arranges a mortgage with a lender at the beginning of construction and uses those funds for the construction costs. At the possession date, the purchaser assumes the existing mortgage from the builder for an amount negotiated with the lender. Through this assumption, the builder is released of their obligation on the mortgage and funds have been received over the construction period. The purchaser only needs to make a payment to their lawyer to complete their committed down payment for the purchase.
Because the purchaser is assuming the mortgage, their lawyer does not have to prepare and register new mortgage documents, which reduces the legal fees incurred by the purchaser. The purchaser starts to make principal and interest payments at the time of possession. The interest rate is determined by a discussion between the lender and the purchaser, normally at the time of application.
The builder usually asks the purchaser to get approval for the assumption mortgage at the time they sign the purchase contract and before they start to build the home.
Completion Mortgage
This is where the purchaser makes a deposit at the time of signing the purchase agreement and arranges a mortgage with a lender at that time. The builder uses funds from their own sources to build the home. At the possession date, the purchaser’s lawyer registers a mortgage on the property and receives funds from the lender to pay the builder for the balance due on the contract.
Progress Draw Mortgage – Purchase from an established home builder
In this situation, the builder outlines a schedule of payments for the purchase of the homes. The builder generally asks for payments at certain stages of construction (i.e. basement complete, framing complete, etc….). The purchaser arranges a mortgage with a lender which allows funds to be made available at certain stages of construction, so that the purchaser can make payments to the builder. At the possession date, usually all of the funds are fully advanced from the mortgage and the builder is paid in full for the home.
Please note, payments required to the builder may not coincide in date, or amount, to the advances the lender is prepared to make. Each construction situation must be reviewed on its own to ensure the project will cash flow properly.
The purchaser normally makes interest only payments on the funds that have been advanced until the time of completion. The purchaser starts to make principal and interest payments at the time of possession
Progress Draw Construction Mortgage – Purchaser acting as their own general contractor
As their own general contractor, the purchaser hires and pays each trade worker or firm for the work they do on the project. For example, the purchaser hires plumbers, electricians, carpenters, heating contractors, etc… The purchaser also buys and pays for many of the raw materials such as lumber, drywall, bath fixtures, lighting fixtures, etc...
The purchaser would apply for a mortgage from the lender and once approved, the lender will advances portions of the mortgage money to the purchaser based on the stages of completion of the project. Upon receipt of funds, the purchaser can pay their bills for materials and labour.
The purchaser normally makes interest only payments on the funds that have been advanced until the time of completion. The purchaser starts to make principal and interest payments at the time of possession.
