When purchasing a new construction home, there are many exciting things to think about and plan for. One important part of the planning is how you will finance your new build.
We’ve compiled the three most common areas for consideration when building your new dream home. However, there are situations that affect people differently; therefore, it's important to ask any questions you have about your situation with your mortgage planner. They will plan the most effective way for you to structure your financing so that you have peace of mind during the building process!
Depending on how you earn money, your lender will need to see some, or all of, the following documents:
- Confirmation of Employment (employment letter, paystub)
- Tax Returns/T4’s/Notice of Assessments
- Business Financial Statements
How much of a deposit does the builder require to begin construction on your home?
Your deposit can be part, or all, of your down payment. This will depend on the builder’s requirements and how much you are planning to put towards your down payment.
If your builder, for example, requires 15% of the purchase price as a deposit, and you are making a total down payment of 20%, you will need to ensure you have available the 15% cash at the beginning of the process and the remaining 5% when you get the keys to your new home.
Effective February 2016, the minimum down payment for new mortgages have been modified:
- For homes with a purchase price less than or equal to $500,000, the minimum down payment is 5%
- For homes with a purchase price greater than $500,000 and less than $1 million, the minimum down payment is 5% of the first $500,000, plus 10% of the remaining balance
- For homes with a purchase price of $1 million or more, the minimum down payment is 20%
One important thing to also consider is where the down payment will come from. There can be different ways borrowers obtain the down payment for their new construction home:
Savings/Investments– Most lenders require a 90 day history of your savings/investments
Sale Of Your Current Home– in many cases, the down payment (and the deposit) is coming from the sale of your home. What is not always planned for is how to provide the deposit at the beginning of the process. Typically, you will need some money upfront before the build starts and since your house has not yet sold, you will need a short-term strategy to obtain the deposit.
Consider what you will do if your current home doesn’t sell by the time your new home is ready. Hopefully it sells, but because the sale of your current home can’t be guaranteed, plans must be made to ensure you will have the remaining down payment by the time you are ready to take possession of your new home.
There are a couple of ways this can happen. If there is enough equity in your current home, you could qualify for a Home Equity Line of Credit (HELOC). Adding a HELOC to your home will allow you to access some of the equity in the home now so that you can meet the builder’s deposit requirements as well as having the remainder of the down payment at the time you get the keys to your new house. Once your current house sells, the existing mortgage and HELOC are paid out!
Some homeowners will also have parents provide the cash needs until their house sells, or have even sold their current home right away and will move in with family or rent instead of using a HELOC.
These are the three most common areas for consideration when building your new dream home. However, there are different situations that affect different people “differently”, so it’s important to ask any questions you have aboutyoursituation with your mortgage planner. They can help you plan the most effective way for you to structure your financing so that you can concentrate on the fun parts of the building process!
For more information or questions on financing, please contact Julie Cooper with Axiom Mortgage Solutions at 780.982.1154