What is a Draw Mortgage?
When you are building a house, the builder is going to need to pay for the construction costs; a draw mortgage may be one of the ways a home builder pays for the labour and materials to build your home. The mortgage company will give money to the builder throughout the stages of construction to get the home built.
Real Estate Agent Explains Draw Mortgages
Certain stages of construction warrant a ‘draw’ on the mortgage so that the next phase can be completed. There may be three different draws on the mortgage to finance the building of the home, or there could be more draws upwards of five or more, depending on the arrangement. Sometimes a draw mortgage is called a progress draw mortgage because the money is doled out as the construction progresses. This kind of mortgage differs from a conventional completion mortgage where funds would be transferred to the builder upon completion – not before.
Here is an example of multiple financing draws on the mortgage allowed by a lender in a progress draw mortgage:
Stage 1 – Roofing Stage – The foundation has been poured and the roof is on. The home is something like 35% done.
Stage 2 – Intermediate Stage – The home is approximately 65% complete but interior finishing has not yet been done.
Stage 3 – Completion – The home is ready for the owner and has an occupancy certificate. The final advance is not given until final inspection proves that the home is complete.
Each stage will likely require a progress inspection report which shows that the appropriate work has been completed before funds are released to the builder. A lender would not want to give all the money for construction and find out months later that work has not progressed.
Why Does it Matter?
Because a draw mortgage is arranged before construction starts instead of after it is finished, interest could be charged to the client (the future owner of the home). If this is the case, it would be an important factor, because paying interest on a mortgage when you haven’t got a house yet might not be what you want. If, however, the interest is paid by the builder because they are using your mortgage to build the home, then that might be OK with you, the client. Another important factor is that the title will be in the client’s name before completion, so the home is actually owned by the client before it is complete. Also, if a draw mortgage is placed early and the interest rate is fixed at that time, a client may get a lower interest rate than they otherwise would have gotten if the mortgage was placed at the time of completion.
These are just some of the considerations to be aware of when purchasing a new home. If you need help sorting it out, please reach out.
