medicine hat mortgage broker
Medicine Hat Mortgage Broker


Medicine Hat Construction Mortgage


Every mortgage lender will extend a loan to those who have a large enough down payment and good credit if you’re buying an existing, cookie-cutter home. This could be a condo in downtown Medicine Hat or conventional single family home in the suburbs. A smaller number will give you a loan to buy money to buy land to build a suburban home on, but even fewer will fund the construction of a new home. The risk is considered too great for many banks, though a Medicine Hat mortgage broker can help you find a competitive rate on a construction mortgage. Here are a few of the ways that construction mortgages in Medicine Hat differ from conventional mortgages.


Loan Structuring


If you already own your home, you can borrow against the home equity via a HELOC or second mortgage to pay for the renovations or repairs. When all you have is a plot of land, you don’t have much equity and it is all in the loan. When you buy the land, you’ll need to put 20 to 35 percent down on the property, though you can certainly use land you own outright. When you get a construction mortgage, the mortgage lender minimizes their risk by using the first payment or “draw” to pay off the land loan. The money you’ve already invested in the land becomes part of your equity in the property.

The term “draw mortgage” is used interchangeably with “construction mortgage” because of how the loans are structured. The lender doesn’t just give you the lump sum of money. Instead, the money is released in several lump sums called “draws”. These lump sums are paid out once various thresholds outlined in the mortgage commitment letter. For example, payments to contractors as work progresses are generally only made once an inspector verifies the work is good enough. If the work is shoddy, the bank may not release any more money until repairs or made. Or they may require you to replace the main contractor.


The Different Definition of Conforming Real Estate  


A construction loan will be dependent both upon your credit and whether or not the house is going to be easy to sell once built. This is simply risk management on the part of the lender.  Another way that they limit their risk is requiring inspections at every stage of work before they release money. If the work is poor quality, if you used unqualified contractors, if the project went way over budget, the lender can refuse to release more money. You’ll be forced to find a different lender to fund the rest of the construction project. Know that those loans have a much higher interest rate than a construction loan.

Lenders will withdraw if you make major changes to the project in progress, whether you’re adding onto the building, stretching out the schedule by delaying key decisions, or altering the intended use of key rooms. They approved the project based on a set of blueprints and a schedule, while having a list of vetting contractors for every major task is a point in your favor. If they find out you’re trying to save money doing work yourself instead of relying on qualified contractors, they may stop funding the project. The banks want one contractor or builder to complete the full project with one offer to purchase for the new build.


Loan Terms


Construction loans are often a short term loan intended to be paid off when you get a conventional mortgage for the property. In some cases, the construction loan can be converted to a traditional 5 to 25 year mortgage. Most construction mortgages will not penalize you if you pay the balance early, while closed mortgages most certainly do this. Construction loans only charge interest on the amount you’ve borrowed to date. A conventional Medicine Hat mortgage will charge you interest only on the amount you’ve borrowed via draws to date. The lender will have no problem if you don’t spend as much as expected, as long as the quality of work is high enough.

The interest rates on land loans are higher than mortgages, however once converted to a mortgage with a construction draw or new build mortgage the rate is a normal fixed rate. You can shop around for Medicine Hat construction mortgages just as you can conventional mortgages. Talk to a mortgage broker like Whalen Mortgages Medicine Hat to understand your options. For example, you might be able to borrow against the equity in your current home to begin the process of building your dream home.

If you want to get started call your trusted Medicine Hat Mortgage Brokers today 587-430-1555.