What is a Construction Mortgage, and How Does it Work?
A construction mortgage is a kind of short-term home loan program that helps fund the cost of building a house. Construction mortgages in Toronto can convert to a regular mortgage after some time, and it can also be a construction-only loan that comes due after the project is completed.
How Does a Construction Mortgage Work?
A construction mortgage works a little differently compared to a regular home loan. For starters, they come in the short-term and have higher interest rates than traditional long-term mortgages. The funds are used for the construction of a house structure and also for permanent fixtures.
After every phase, the process is verified with an inspection and the title is updated before the lender releases the next payment. During the construction phase, the borrower only needs to make interest-only payments. In some cases, payments do not start six to 24 months after the loan is made.
After the project is completed, the next steps depend on the type of construction mortgage. For stand-alone construction loans, the borrower has to pay the loan done by refinancing.
Types of Construction Mortgages
There are two important construction mortgages known as stand-alone or to-close construction loans. Whether it is a stand-alone or construction-to-permanent loan, the best option will depend on your situation. Each of them has its pros and drawbacks that are explained in detail:
Stand-alone construction loan
Many people prefer to go with this type of transaction. They begin by applying for a short-term construction loan that covers the fund required for the building. They apply for a new-home mortgage after this.
Before opting for this type of loan, people look out for commercial mortgage rates in Toronto. It can also provide more flexibility and time to shop for improved interest rates for your mortgage than the one offered by other lenders.
Construction-to-permanent mortgage
This type of mortgage is a simple-closing transaction that involves only one application process and closing. Once the loan is approved, you can set aside financing for the property and the completed house. You only need to pay interest on the construction loan portion while it is constructed.
Factors to Consider Getting a Construction Mortgage
Some factors that you need to consider to get a construction mortgage are:
More money down
You can expect to put up more cash for construction loans, and you need a 20 to 25% down payment.
Stronger credit scores
You might need a minimum credit score as high as 700 for some construction loans higher than other standard mortgages.
Builder reputation
The builder also needs to be approved by the lender, and for construction financing, lenders need you to work with a contractor licensed by the state.
Final Words
Sometimes it is possible to get a Construction mortgage in Toronto with fewer credit requirements and lower down payment. You can contact real estate firms that can provide you with such loans, but you also need to consider the eligibility.
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Adam Steven is the author of this article. To know more About Construction Financing in Toronto ON please visit our website: dianebertolin.com
