Building a new home in Edmonton is an appealing option for many considering owning, however, there are questions that need to be addressed before this avenue can be traversed with confidence.
Where Can I Build My New Home?
Location will be a key determining factor in whether you receive approval to build the home you want. It can also affect your approval for a construction mortgage. When you choose a location too remote or in proximity to a perceived negative effect (ie. flood plain, landfill) then you can have additional obstacles finding a lender that will work with you. The best advice is to work with your Realtor and mortgage professional before this selection is made in order to avoid disappointment further down the road.
Can I Get A Construction Mortgage?
There are a number of lenders who have a mortgage product catered to a new construction project. The process is the same as a normal mortgage application in that you will need to qualify for the full debt using your employment and credit rating before a dollar is forwarded toward construction. The difference here is that the bank has no security in a completed home to sell off in the case of a mortgage default. This is overcome by draws of portions of the loan forthcoming upon completion of milestones preset in the contractual agreement. Upon completion of the build the mortgage is usually convertible to a fixed term mortgage at the best rates of the day.
What Kind Of Down Payment Is Required?
This is a good question and will depend on whether you already own the plot of land you are looking to build on or require financing on this as well. Some banks will only allow a construction mortgage on land that is owned outright. If you are starting from scratch – you will find that mortgages on land will top out at 50% loan to value (50K on a 100K plot) so this is the entry point. After this you will need an additional 20% of the estimated finished value of the property as a down payment toward the construction mortgage. An item to note is that once the property is completed – this can be converted to a 5% down payment insured mortgage providing you with an additional cash injection on closing upon approval.
With all this said – there is a select lending pool which will consider your application towards the acquisition of the land and the build in one mortgage transaction. This means that your 20% down payment will go towards the full build out value of the home including the price of the plot of the land (Example: 100K lot + 250K home = 350K X 20% = 70K down payment). This is the most efficient way to facilitate the construction of your new home.
What Happens During Construction?
In the euphoria of planning the realization of your dream home – you will need to know what happens once the process is underway and how to meet your financial obligations. As your construction draws become available – you will need to service the mortgage debt on a monthly basis. The best case scenario is that the bank allows you to pay an interest only instalment until the project is completed. This ensures that you are able to focus on getting the project completed and not allocating capital to paying down what is owed. This is something to consider ahead of time as your down payment in a lot of cases has tied up your family’s liquidity in the project.
The process of a new construction mortgage is an involved and complicated one. The best way to navigate it with confidence is to ask a lot of questions and speak with everyone involved personally. This includes your Realtor, Mortgage Broker, Appraiser, Municipal Planning Department, Architect, and Contractors. Once you have satisfied this step – then it just a matter of finding a great location, getting your construction financing approved, securing your down payment, and having a plan to keep afloat during the build.