If you’re thinking of building a home in the near future you will need a construction mortgage for the process. Some builders require a construction mortgage be in place before they start to build your house. Construction mortgage for this scenario is quite simple, the builder would supply us with the information regarding the specifications, permits, building plans, New home warranty and the offer to purchase. They would then ask for draws on your construction mortgage at different times during construction, this means at different stages they would be asking for an inspection and then give the money to the builder. You would then be responsible for the interest on the parts of the money that has been drawn.
If you are building the house yourself and require a construction mortgage then the scenario become very different. If you are building the house yourself first you will need to input your money into the project yourself. In this scenario where you are the general contractor you will be responsible for the blue prints, all of the estimates of the construction, all of the permits and the new home warranty. Regular lenders do not like this type of mortgage any more as they find that very few people have the skill set to go ahead and organize trades and order materials to keep the job on track. This is where our private sector lenders have picked up much of this business and most end up here for their construction mortgage.
Private construction mortgages are not unlike the scenario above, they would need the same information and due diligence on the costs. Private construction mortgages usually go to 75% of the cost to complete the building and rates would be in the 8 to 12 % range for most of the lenders.
Types of Construction Mortgages
There are two types of private construction mortgages that can be gotten, one would come from a Mortgage Investment Company and would be set up on a draw basis and you would only pay interest on the money drawn. The second would be through a syndicated mortgage and with this scenario all of the money is advanced to the lawyers at one time and you would pay interest on the full amount from day one. Construction mortgages of this type are mostly used by small builders trying to build up spec inventory to sell, it allows them to finance each property individually and not tie up their cash.
As you can see construction mortgages can be a lot more work than a regular mortgage, getting the information in place for a construction mortgage can take weeks of your time. The savings of building would need to be weighed against how much time you have, your purpose for building and getting the end results you were seeking.