Financing a Custom Built Home: What You Need to Know About a Construction Mortgage

Financing a Custom Built Home: What You Need to Know About a Construction Mortgage

September 12, 2018

The housing costs in Canada have been on a steady rise over the past few years. Many people are choosing to use the property they already own or buy a vacant lot and build a new home from scratch.

This option does allow you to build your dream home, but financing is a major question to consider. Whether you have a spot picked out or are still searching for the perfect location, you will need to consider the future of your finances.

Everyone wants a dream home–a home that meets their exact needs. How does the financing of a construction mortgage compare to a traditional mortgage?

Continue reading to find out more about the costs of building a custom home.

Choosing a Plot of Land

Location is everything, right? If you are looking to buy a new plot of land to build your home, you may find that staying away from the big cities will save you some money. This might be attractive if you wish to put more money into the home itself.

However, you will need to consider the potential costs of nonexistent infrastructure. If you need a septic system and a well, these combined expenses may cost upwards of $70,000.

Keep in mind that you will need to take out a loan to acquire the plot of land. As with any loan, you will need to put down a sizable deposit. Some lenders may also allow you to open a personal line of credit or a Home Equity Line of Credit (HELOC).

Before you purchase a plot of land, check with the local municipality to find out about building codes and environmental factors you must consider.

Drawing Up Plans

After you choose a plot of land, you will need to figure out the style of your home. You may be able to find a pre-drawn or stock plan that fits your needs.

However, a more custom home may require the assistance of an architect. The cost of an architect is generally around 7% to 15% of the overall cost of the home. The fees will depend on the complexity of the design and the scope of the project.

If you work with an architect or a custom home builder, you will be able to better customize your home to your needs. You will be able to choose where each room is, how big they are, and more.

You will also need to consider local zoning laws and other restrictions as you approach this step of the process.

Hiring a Builder

Unless you plan on acting as your own general contractor, you will probably hire a builder to build your home.

These costs are usually calculated per square foot, meaning that a larger home will cost you more. The average price per varies depending on the materials used, the custom features you choose, and whether you build up or out.

A more spread out floor plan will cost more money due to excavation and foundation work.

You will need to pay your builder, so it is important that your loan is secured before you start this process. You may need to pay a decent sized deposit before your builder will begin working. These deposits will generally be larger than a typical home mortgage deposit.

The Construction Mortgage

Securing a loan for a home that you will build from scratch is often much more difficult than securing a loan for an existing home. Lenders will want to have more assurance that the project will be seen to the finish.

In addition to having good credit and income, you will need to provide proof that you will be able to complete the project within a certain timeframe. The lender will also want to know that the contractor you are using has the proper certifications and has a good record for completing projects.

You will likely need to put down between 25% and 30% when you acquire the loan. This is much more than an average home loan.

If you are starting from scratch, you will likely hear about a progress draw mortgage. This means that the lender will give you the money you need as each portion of the project is completed.

The lender will periodically send an inspector to check on the progress of the construction. The inspector will submit a progress report to the lender with each visit. Keep in mind that you may be responsible for these inspection fees.

If the project is making progress as planned, the lender will grant more funds accordingly. If the project is not coming along as planned, the lender may choose to withdraw the funds.

This reason and more are why it’s so important to find a home builder with a proven process like HR2 Construction. We provide our clients with an online portal to always stay updated on their home building project and to get important documents and records when needed.

Are You Ready to Build Your Dream Home?

Starting a new construction project can be an exciting time in anyone’s life. Building a dream home is something that many people will never be able to do.

If you are looking into building a custom home, you need to be ready for the time investment as well as the financial investment. Securing a mortgage on a home is hard enough. In order to secure a construction mortgage for a home that has yet to be built can sound like an impossible feat.

The lenders want to make sure that they will get a return on their investments.

If you’re prepared to take on that financial responsibility, then building a custom home may be a great option for you.

Ready to embark on this exciting new adventure? If so, feel free to contact us. A new and beautiful family home is always worth the time and money.

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