What Is A Construction Mortgage?

construction-mortgage-new-jerseyIf you’re thinking of building your own home, a construction mortgage can help provide you with the financing you’re looking for. Why purchase a resale home, when you can build one instead? When you build your own home, the options are endless – you can choose the perfect location along with the finishing touches on your home.

Unless you have a lot of money stashed away for a rainy day, you’ll need to get a construction mortgage to finance building your new home. A construction mortgage differs from a residential mortgage. You’ll need a lot more than a five per cent down payment up front.

Obtaining a Construction Mortgage
Similar to applying for a mortgage on your principal residence, you’ll need to apply for a construction mortgage with your bank. Once you’ve selected a product that meets your needs, your lender will perform an appraisal. Since your new home hasn’t been built yet, your bank will appraise it based on the lot and building plans. When your mortgage has been approved, you can begin building your new home.

Just like residential mortgages, lenders offer some protection from higher mortgage rates. Your can obtain a rate hold up to 90 days when your mortgage is approved. If mortgage rates go up within 90 days, you’ll still receive the same low mortgage rate you were approved at.

Drawing Down Your Money
Your mortgage lender won’t simply provide you with the full amount of funding for your new home up front. Your new home hasn’t even been built yet, so how could your lender possibly recover any money if you were to default? Instead, you’re given a portion of your funding when you pass key dates or “draws,” as your lender refers to them. Your construction mortgage is usually given to you at three different stages.

A five per cent down payment won’t cut it with a construction mortgage. You’ll need at least a 20 per cent down payment to qualify for a construction mortgage. Your first draw can be for as much as 65 per cent of the value of your land. The remainder of the funding is staggered over key dates.

The Different Stages
As mentioned, construction mortgages take place over a number of stages or draws. The first draw should take place within 90 days of obtaining your construction mortgage; otherwise your rate hold will no longer be in effect. You’ll need to have some savings set aside to begin construction, as you lender won’t allow you to take your first draw until work has begun.

You should be in close contact with your lender throughout the construction of your new home. Each time you require funding, your lender will send an appraiser to your home to ensure the work has been completed. Once approve, you’ll be able to access more funding.

Your last draw must take place within a year of your mortgage being approved to maintain your rate hold. Once the appraiser confirms the work has been completed, your regular mortgage payments can begin.