If you are considering building a new home, then you need to be educated on the difference between draw and completion mortgages. When you meet with a builder, there is tons of terminology and information you should be aware of so you are properly covered.
Completion mortgage means that the builder does not expect any funds until you take possession of your new home. Before the building process begins, you will have to go to your mortgage professional to get your application verified for the build to start. The benefits of this option are that you don’t have to put down any payments before you take possession, you can add upgrades to the mortgage, and the lender doesn’t require all final information from you until 30 days before you take possession. During this build process you will want to take extra care of your finances to ensure nothing changes, which could put your initial approval in jeopardy. Any changes that could possibly change your financial position and your credit should be discussed with your mortgage professional. This can include things like switching jobs, buying a car, and taking out any new loan.
A draw mortgage is preferred by home builders because it allows them to receive portions of funds during predetermined stages of the build process. To obtain a draw mortgage, the beginning process is the same and you will have to go to your lender to be verified for the build to begin. The benefits of this option are that the builder is able to manage their cash flow, inspectors are sent to verify stages of development are met, and funds sent to the builder are handled through a lawyer. There are some extra costs associated with this option though. Inspections will incur a cost upon each stage met and interest payments may be incurred as well. You also do not have the option to add upgrades throughout the build process with a draw mortgage as the first advance sets the loan in stone.
As always, if you would like to discuss draw and completion mortgages in preparation for your new build contact us at Dominion Lending Centres! We are happy to help you figure out your financial future.
Thanks to my DLC colleague Alim Charania for this article.