Do You Need a Mortgage for Pre-Construction?
If you're considering purchasing a pre-construction property, you might be wondering if you need a mortgage for it. The short answer is yes, in most cases, you will need a mortgage to finance your pre-construction purchase.
Most developers require proof of financing before they will sell you a unit. Additionally, getting a mortgage pre-approval can help you determine your budget and ensure you're not overextending yourself financially.
Key Takeaways
In most cases, you will need a mortgage to buy a pre-construction home.
Getting a mortgage pre-approval can help you determine your budget and ensure you're not overextending yourself financially.
Pre-construction mortgages are specifically designed for pre-construction purchases because you won’t be able to get a regular mortgage until the construction is 120 days from completion..
Understanding Pre-Construction
If you're considering buying a pre-construction property, it's important to understand what it means and how it works. Pre-construction refers to a property that is not built yet but is in the planning and development stages. Often, the property may not be ready for occupancy for several months or even years.
When you buy a pre-construction property, you are essentially buying a promise from the developer that they will build and deliver the property to you at a future date. This means that you will need to have patience and be prepared to wait for the property to be completed.
Why You Need a Mortgage for Pre-Construction
If you are considering buying a pre-construction property, you might be wondering if you need a mortgage. While it is possible to pay for your pre-construction property in cash, most buyers will need a mortgage to finance their purchase.
Here is how payment for a pre-construction mortgage works, to help you understand why you would need a mortgage:
1. Deposit requirement
When you buy a pre-construction property, you will usually be required to make a deposit to secure your purchase. This deposit is typically between 5% to 20% of the purchase price. This deposit counts towards your down payment for the property.
2. Final payment
When the construction of your pre-construction property is complete, you will need to make the final payment to the builder. This payment is due on closing day, which is when you take possession of your new property. If you don't want to pay cash to purchase the property, you will need to obtain a mortgage to finance it.
The Process of Getting a Mortgage for Pre-Construction
If you're planning to buy a pre-construction property, you'll likely need a mortgage to finance the purchase. Here's what you need to know about getting a mortgage for pre-construction.
Pre-Approval
Before you start shopping for a pre-construction property, it's a good idea to get pre-approved for a mortgage. Pre-approval gives you an idea of how much you can afford to spend on a property and shows developers that you're a serious buyer.
Choosing the Right Lender
When it comes to choosing a lender for your pre-construction mortgage, you have several options. You can go with a traditional bank or credit union, or you can work with a mortgage broker who can help you find the best rates and terms.
Most pre-construction mortgage rate holds are provided by large banks and credit unions. The most important factor in choosing the right lender is obtaining a rate hold. A rate hold allows you the piece of mind that you have a “worst-case scenario” for your mortgage rate. If rates improve before you take possession of the property, this is a bonus, but the rate hold locks in a ceiling on your interest rate.
Finalizing the Mortgage
As your possession date approaches your mortgage broker will work with you to make sure that the original pre-constrution mortgage is still the best fit for your situation. If there have been changes to rates or products, they might suggest moving to another lender that could be more advantageous.
Once you've chosen a lender, you'll need to finalize the details of the loan. This includes deciding on the interest rate, term length, and payment schedule.
With pre-construction mortgages, you won't start making payments until the property is completed and you take possession.
Benefits of Having a Mortgage for Pre-Construction
When it comes to buying pre-construction, there are many benefits to having a mortgage. Here are a few reasons why getting a mortgage for pre-construction can be a good idea:
Lock in a low interest rate: One of the biggest advantages of having a mortgage for pre-construction is that you can lock in a low interest rate before the property is even built. This can save you money in an increasing interest rate environment.
Reduced stress at closing: By getting pre-approved for a mortgage, you know that you’ve purchased a pre-construction home that is within your budget. Applying for and obtaining a mortgage approval ensures that you will be able to close on the property assuming your financial situation remains the same.
Possible Risks and Challenges
When it comes to investing in pre-construction properties, there are some potential risks and challenges that you need to be aware of. Here are two of the main ones:
Appraised value changes: when you purchase a pre-construction property you are committing to purchase on a date in the future at a fixed price. Sometimes markets change direction and prices move downward. If the pre-construction condo that you are purchasing appraises at less than the agreed-upon price, you will be required to make up the difference in cash.
Protip: when you’re working with a mortgage broker, ask them what they’re doing to mitigate future appraisal risk on the project. Appraisals can be ordered at submission - it’s worth it!
Project delays or cancellations: While developers typically provide estimated completion dates for their projects, unforeseen circumstances such as labour shortages, weather delays, or funding issues can cause delays that push back the completion date. In some cases, projects may even be cancelled altogether.
Protip: Review your contract to know what you’re entitled to if the project is delayed or cancelled.
Rate hold expiry: Delays to a project can result in your interest rate hold expiring. If your projected completion date is in January 2023, you may only have a rate hold until that date. If the project is delayed more than a couple of weeks, unfortunately, lenders will not extend rate holds. In this case, you’ll have to take a new mortgage at current rates.
Protip: Try to obtain a rate hold that extends 6 months beyond your projected completion date.
Employment Risk: When you obtain a pre-construction mortgage, it’s based on your income and down payment situation today. Prior to funding the loan, the lender will want confirmation of employment. If you’ve had an unfortunate change in employment, you may no longer qualify for the loan.
Protip: If you’re worried about employment risk, discuss this with your mortgage broker. They should choose a lender that verifies income at submission.
Pre-Construction Mortgage Advice
Buying a pre-construction property can be a great investment opportunity and a great way to get first choice on your lot or condo unit, but this type of transaction does come with some risks.
When applying for a pre-construction mortgage, it is important to understand the risks, benefits and rate hold terms available. You should also work with a mortgage broker or advisor who specializes in pre-construction financing to help you navigate the process and find the best deal.
For guidance on your pre-construction mortgage, contact Spire Mortgage.
