How does a construction mortgage differ from a regular mortgage?

Construction mortgages will carry higher rates than regular mortgages due to the greater risk incurred on the part of the lender. After all, building a home is a complex & long process, and is no stranger to running into delays or unforeseen road blocks. In turn, construction mortgages are often harder to obtain than regular mortgages as well. 

Reviewing your financing options

When it comes to choosing a lender for your construction mortgage, private lenders offer significantly more flexibility. However, they also generally carry higher interest rates than traditional lenders. Below, we break down the two options for financing your construction mortgage. 

How do private lenders differ from traditional lenders?

Traditional lenders, or an “A lender”, are generally banks or credit unions that offer the lowest rates. Because they’re federally regulated, this means that the restrictions applied to who they grant loans to are extremely strict. Borrowers must have solid credit scores, stable employment income, and a minimum of a 5% down payment. 

Private lenders, or alternative lenders, are individuals or small companies that provide mortgages on a short-term basis and do not need to follow the strict requirements imposed by the government on who they can qualify for a mortgage. 

When should I use a private lender?

There are a lot of reasons to proceed with a private lender and at Flash Financial Mortgages, we are B.C.’s preferred private mortgage broker. What we’ve found, and many industry experts and builders agree, is that construction projects typically get stalled because of financing. In this case, alternative lenders are much more flexible to deal with. That’s why we often proceed with the construction portion of a mortgage with alternative lenders over a bank.

Generally, once a construction is complete and a home is move-in ready, you’ll transition to your traditional mortgage. However, when you’re in the thick of building, conventional institutions’ construction programs don’t offer the same kind of flexibility or deep understanding as qualified private lenders. When you run into a construction delay—which is nearly inevitable with building a home—a bank will slow down the entire process due to rigid protocols, costing you more money along the way. 

As a result, despite the higher rates that private lenders provide, they actually provide you with the immediate access to funds that you may need during construction. Plus, they typically grant you a higher qualification than you would ever typically receive with a bank, which means that you’ll have a greater pool of funds to tap into throughout the process. 

In turn, private lenders can actually save you money in the long run. 

What is a construction draw mortgage?

A draw schedule is the detailed payment plan associated with funding the construction of your home. Generally, funds are released once certain milestones have been reached throughout the build—in other words, you “draw” money from the total loan amount on an incremental basis. As work is completed, you are then able to pay the builder or contractor you’re working with. 

Construction draws with private vs traditional lenders

When working with a traditional lender like a bank, you’re working with a very rigid schedule with one to five draws. If you haven’t reached a certain milestone completely, then no money will be released for the next stage under any circumstances. 

For example, let’s say you’re expecting $150,000 to be released at the final stage (or the lock-up stage) and you submit a draw request to the bank. They will then take the time to review every document, order and approve inspections, and ensure that all of the work that was associated with the lock-up stage has been completed. If there is one document out of order or box left unchecked, you won’t receive a penny from them. 

A rigid draw schedule may be reasonable for an individual with a lot of cash on hand and can push the project along as-needed on their own. However, private lenders offer the average homeowner the flexibility they need to fund the construction of their home throughout any unforeseen obstacles. 

With private lenders, there can be an unlimited number of draws. For example, you could receive one draw with just 1-2% of the project complete. In turn, you’ll never experience delays—saving you a ton of money in the process.