Of Prime Interest: Options for mortgage financing

Mortgage financing for the purchase of an existing property is typically not too complicated.

  • Dec. 11, 2014 10:00 a.m.

Buying a new or existing home offer two very different paths to consider when dealing with mortgage financing.

Mortgage financing for the purchase of an existing property is typically less complicated.

You will be required to provide a copy of the offer to purchase agreement and the MLS listing. The purchase price and possession date will be negotiated and reflected in the purchase agreement.

You will proceed with your financing request and meet the lenders conditions prior to your condition removal date which is usually seven to 10 days from the date you write the offer.

During this time, you will arrange for a home inspection and inquire about home insurance to confirm all is satisfactory for you to proceed.

It also allows sufficient time for the lender to unconditionally approve your financing request and provide you with the documentation that will enable you to remove the financing condition.

You will have a clear knowledge as to the condition of the home, what your mortgage rate and  payment will be.

The situation with a new build is more complicated. There are two different mortgage options available for financing your new home.

The first is called a completion mortgage, which is somewhat similar to the financing for an existing property.

It differs in that there will most likely be a longer rate hold required (the length of time it takes to build the home) and the rate could be higher than the rate you are able to get if you were closing within the usual 90 to 120 days.

That is due to the fact that the mortgage is not advanced until the property is 100 per cent complete.

Typically, the builder requires an initial deposit at the time you sign the purchase agreement and the balance is not required until the property is complete.

The second option is called a draw mortgage, where your builder will require multiple advances of the mortgage funds at specific stages of construction.

You will go through the same process as above for approval for financing with a few variations. The property will be appraised based on the lot and the plans/specs and you will provide your down payment after your mortgage is approved and the construction of your new home begins.

The draw schedule required by your builder is detailed in the purchase agreement you initially signed with the builder and the mortgage rate you secure could be set at the time of the first draw depending on the lender. In some cases the mortgage rate is not set until the home is completed and you pay interest only during the construction phase. Your builder will request three to four mortgage draws throughout the construction process.

At the time of request for the draw the lender will require the original appraiser to inspect the property to confirm the work is complete and estimate what is left to complete. The draws are based on cost to complete basis a complicated calculation that allows for the lender to closely monitor the build and always allows that the lender has held back enough funds for completion based on what is complete at each draw.

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