ortgage Process for New Home Construction Handshake Featured ImageWhen many people think of mortgages, they think of buying a resale home with a down payment, then making monthly payments once moved in.

When it comes to building a brand-new home from scratch, you might assume it works the same way. 

However, it takes time for a new home to be built. And if you wish to use the money you get from selling your current home to purchase your new home, this becomes a problem, as you’ll likely still be living in your old one while the new one is under construction. 

The option, then, is to take out a mortgage to pay for the construction of your new home. There are two types of construction mortgages: completion mortgages and draw mortgages. 

Let’s take a closer look at these two mortgage types and their governing rules to determine which option best satisfies your needs. 

Completion Mortgages

ortgage Process for New Home Construction Agent ImageWith a completion mortgage, you don’t have to make builder payments until your home is fully constructed and you legally “possess” it. You do, however, have to submit an application and be approved for this type of financing by your mortgage provider before construction begins.

The clear advantage of this type of mortgage is that no payments are required prior to the date you officially take possession. In addition, you have up to 30 days before then to add any desired home enhancements or changes to your mortgage and to supply your lender with all the required data. It’s important to try to avoid any major financial changes during the construction period, such as transitioning into a new job or taking out other loans, which may retroactively affect your pre-approval

While completion mortgages can provide some security due to the fact that they’re not set in stone until there is a tangible property to inspect, the fact is unexpected issues can crop up during the build. Fortunately, most creditors who process completion mortgages want the construction stage to be finished within about four months, so major problems are unlikely to occur.

Draw Mortgages 

Draw mortgages disperse payments to builders in two to three increments or “draws” during the build, usually when it’s around one-third, two-thirds, and 100% completed. Before each draw, an inspector must visit the property to confirm things are progressing as they should. Once everything’s been approved, the builder receives the funds you’ve provided through an attorney. Most home builders prefer these types of mortgages, since they furnish funds at certain points during the build and allow them to better control their cash flow. 

Similar to a completion mortgage, you must receive lender approval for a draw mortgage before the build begins. A small fee is charged for each inspection, and there may be interest charges as well. Once the first payment has been dispersed, a draw mortgage is for all intents and purposes “sealed,” so you won’t be able to add any upgrade changes to it the way you might with a completion mortgage. 

ortgage Process for New Home Construction Architects Image Considerations That Apply to Both Mortgage Types 

Rate caps, which protect homeowners whose properties take longer than 90 days to build from rising mortgage interest rates, are obtainable for both completion and draw mortgages. 

In addition, both options require credit checks and proof of employment history to confirm your financial status. It’s best to avoid buying anything major until your mortgage is secured and all the necessary paperwork has been signed, notarized, and fully processed. 

Your lender will also require you to enrol in a home insurance policy prior to the date you take possession, so you’ll need to continually consult with your insurance provider as the project approaches completion.

In addition, your lender will want to appraise the property you’re seeking to buy and make sure it’s in sync with the terms of your contract. If construction hasn’t begun yet, the builder can provide your creditor with relevant specs and blueprints. If the build has already started, they’ll pay a direct visit to the property to appraise it. 

A helpful tip is to work with the mortgage provider your builder prefers in order to avoid any discrepancies and save time on the approval process. Because they’ve already worked together, any unexpected issues are more likely to be quickly and easily dealt with.

As you probably already realize, constructing a new home is a complex process governed by a variety of location-specific rules, and there is a good deal of legal terminology involved. Knowing the difference between the two types of new home mortgages outlined here will give you a leg up on the proceedings and help ensure no unpleasant surprises arise.


Photo credits: handshake, agent, engineers