Many people ask us how the financing works when building a custom home.
Financing the purchase of an existing home is fairly simple, but when there is no existing home, and you want to have one built, how does that work?
A good place to start is with a mortgage pre-qualification to get an initial understanding of your eligibility for a
mortgage. This step involves a discussion about your income, assets, debts, and credit history to estimate the mortgage amount you qualify for. It gives you a clear picture of your budget and lays a solid foundation for your home building journey.
Once you know how much money you have to work with, you can talk to your Builder about what you want to build, where you want to build it, and what your budget is.
Some people need to, or prefer to sell the home they are living in before starting their new home. Other people would like to live in their home until the new one is built and then move directly from their existing home into the new home. This depends on their financial situation, as well as their risk tolerance.
When building with Kenco Construction, you have two methods of financing your new build at your disposal.
One method is for you to set up a Construction Mortgage (or Builder’s Mortgage) with the bank. This type of a mortgage gives you the funds you need during construction and then at the end of construction, this mortgage is converted into a Term Mortgage. This typically requires you to have 20% of the cost of the entire project. Often this is the cost of the land. So you would purchase the land, and then the bank would give you draws during construction to cover the costs of building.
The other method is for Kenco Construction to finance the project and then you pay for the house at the end of construction. In this scenario, Kenco would collect a 20% deposit from you, and then Kenco would purchase the land that the home is to be built on. When the home is complete and you are ready to move in, you would be required to pay the remaining 80% of the cost of the project. This 80% comes from the Term Mortgage that you have set up at the bank.
The benefits of having Kenco finance the project are:
You can live in your home while the new one is being built. This means you only move once.
You don’t make any payments while your home is being built. The interest costs are added to the 80% that you pay when the home is complete.
It is quite a bit easier to arrange a “Term Mortgage” with the bank than it is to arrange a “Construction Mortgage”.
In the first scenario, you would pay interest to the Bank on the advanced funds on a monthly basis. In the second scenario, you would pay a similar amount of interest to Kenco, (as Kenco is financing the project) but you wouldn’t pay that interest until the project was complete. The amount of interest that you pay is about the same in both scenarios.
What is a Construction Loan? (or Builder’s Mortgage)
A Construction Loan or Builder’s Mortgage provides funds in stages to cover the costs of constructing the house.
1. Application and Approval:
Start by applying for a construction loan through a lender or financial institution. They will evaluate your credit, income, and the estimated cost of your construction project. Once approved, you’ll receive a loan amount based on the projected cost of your new home.
2. Draw Schedule:
With a construction loan, you won’t receive a lump sum upfront. Instead, your lender will create a draw schedule. This schedule outlines specific stages of construction when you can request funds.
Common draw stages include foundation, drywall, cabinets & finishing, and completed.
3. Disbursement of Funds:
As your construction progresses and reaches a predetermined stage, you’ll request funds from your lender.
The lender will typically send an inspector to verify that the work has been completed as specified before releasing the funds.
These funds will go from your bank through the lawyers to your builder.
4. Interest and Payments:
During the construction phase, you'll only pay interest on the amount disbursed, not the full loan amount.
Your monthly payments will be interest-only during construction, which can help manage your expenses.
After construction is complete, the loan can be converted into a traditional mortgage with regular principal and interest payments.
5. Conversion to Mortgage:
Once your home is built, the construction loan can be converted into a mortgage. This transition typically happens smoothly with your lender.
Ready to build? We’d love to meet you and chat about the possibilities. Give us a call or send us a message!