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Unlocking the Secrets of Construction Mortgages: A Comprehensive Guide to Raw Land Acquisition and Financing

by | Jan 11, 2024

Construction Mortgages

Unlocking the Secrets of Construction Mortgages: A Comprehensive Guide to Raw Land Acquisition and Financing


Embarking on a construction project, whether it’s building a dream home or a commercial space, often begins with the acquisition of raw land. Understanding the intricacies of construction mortgages is crucial for anyone venturing into this realm. In this in-depth guide, we’ll explore the different types of raw land, the rates and terms associated with purchasing it, the qualification process, and the essential aspects of constructing your vision.

Types of Raw Land

Raw land typically comes in two forms: serviced lots and un-serviced lots. Serviced lots, complete with essential amenities such as potable water, sewer services, access to hydro, and natural gas offer a more straightforward construction process. However, un-serviced lots may lack some of these amenities, necessitating a larger down payment ranging from 35% to 50%. It’s crucial to note that guidelines may vary among lenders, influencing the down payment requirements.

Rates and Terms

Understanding the rates and terms associated with construction mortgages is essential for making informed decisions. Serviced lots usually come with a maximum mortgage amount, an amortization period, and rates slightly higher than discounted rates. In contrast, un-serviced lots may have higher interest rates and a shorter maximum amortization period, reflecting the increased risk associated with limited amenities.

Qualification Process

To qualify for a construction mortgage, applicants must undergo a comprehensive process. This includes completing a detailed mortgage application, providing credit bureaus and income documents to demonstrate financial eligibility, submitting a thorough construction budget, offering a copy of the purchase agreement, and presenting builder information along with relevant project contracts. Additional documents, such as construction contracts, corporate financial statements, and a title search, may also be required.

The Importance of the Budget

A meticulously crafted budget is the linchpin of the qualification process for construction mortgages. It should encompass both “hard” and “soft” costs, with a reserve set aside to cover potential over-budget expenses. Soft costs include building permits, insurance, legal fees, and more, while hard costs involve actual construction expenses such as demolition, framing, roofing, and landscaping.

Loan Calculation and Draws

Lenders determine the loan amount based on specific guidelines, typically lending up to 75% of the total cost with a 25% down payment. Construction loans are released in draws, each tied to specific project milestones. These draws are calculated based on the budget, ensuring funds are allocated appropriately throughout the construction process.

Transition to a “Normal” Mortgage

Upon completion of the construction, the borrower can transition from the construction mortgage to a “normal” mortgage based on the appraised value of the completed project. This transition involves a final draw and the lender finalizing a new mortgage. This phase marks the culmination of the construction journey and a shift towards long-term, stable financing.

Key Considerations

Understanding that construction loans are usually fully open and can be repaid at any time is crucial. Interest is only charged on amounts drawn, and once construction is complete, the mortgage seamlessly transitions to a standard one. However, it’s important to note potential challenges, including budget overruns, project management issues, liens on the property, and construction delays.


Navigating the intricate world of construction mortgages requires careful planning, detailed documentation, and a clear understanding of the processes involved. By being informed about the types of raw land, rates, qualification criteria, and the importance of a well-structured budget, individuals can embark on their construction journey with confidence. Seeking advice from experienced professionals in the industry can be invaluable for a successful and smooth construction project. Whether building a dream home or a commercial space, this comprehensive guide aims to empower individuals with the knowledge needed to make informed decisions and achieve construction success.

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