Owner’s Quick Guide to Construction Mortgage Draws
One component to building that trips up many homeowners is the construction mortgage draw process. While homebuilding has seen a sizeable uptick over the last couple of years, with an anticipated 210,000 new housing starts to kick off the year, borrowers can still get confused about how construction mortgage draws work1.
The draw schedule is one of the main features that sets construction mortgages apart from traditional home loan programs. Understanding the draw schedule and how mortgage draws work is essential to understanding how your mortgage funds will be paid out, as well as other costs you will need to consider throughout the construction process.
What is a Construction Mortgage?
Construction mortgages, sometimes referred to as a builder’s mortgage, are types of loans used to pay for the construction of a new home. This home may be awaiting to be built or could be a pre-built property.
The biggest difference between a construction mortgage and traditional mortgages is the way the loan proceeds are paid out. Construction mortgages have a draw phase in which funds are typically paid out in smaller chunks as your property is being built.
Most lenders only require interest only payments on the amount of funds borrowers during a construction mortgage’s draw phase. Once building is complete, your construction mortgage usually enters a repayment phase where you will be required to make both principal and interest payments.
How Do Construction Mortgage Draws Work?
Construction mortgage draws occur in the loan’s draw phase. There should be a predesignated draw schedule for your project which indicates how and when Eric’s Homes will be paid.
The draw schedule follows key construction milestones, or phases, throughout the building process. While it can vary, most construction mortgages have a draw schedule following five draw milestones. These milestones include:
- Draw #1 – The purchase of land, excavation, and foundation
Construction is roughly 15% complete and requires 15% of total mortgage proceeds
- Draw #2 – Finished roof and weathering
Construction is roughly 40% complete and requires 25% of total mortgage proceeds
- Draw #3 – Finished drywall, plumbing, and electrical wiring
Construction is roughly 65% complete and requires 25% of total mortgage proceeds
- Draw #4 – Finished interior (including kitchen cupboards, bathroom fixtures, doors, etc.)
Construction is roughly 85% complete and requires 20% of total mortgage proceeds
- Draw #5 – Finalized construction, seasonal exterior work, and preparation for occupancy
Construction should be 100% complete and requires 15% of total mortgage proceeds
As your home is being constructed Eric’s Homes will communicate with your lender when certain key milestones have been reached so that we can be paid for our work.
However, your construction mortgage lender may choose not to release any mortgage proceeds until a site inspection has been completed. There are costs to sending out inspectors for each draw request.
Inspection fees are usually the responsibility of you, the property owner. In rarer cases, lenders may holdback a portion of the draw paid to your builder to cover these progress and inspection fees.
Quick Guide Key Takeaways
One of the biggest differences between construction mortgages and traditional mortgage loans is the draw schedule. When construction mortgages are in the draw phase, Eric’s Homes will be paid in smaller increments as we make progress on the construction of your home.
Most of the time your lender will probably require a formal site inspection before releasing any construction mortgage proceeds to us. You may be required to pay these fees yourself, either out-of-pocket or from your loan proceeds.
While the construction process may seem a bit confusing, once you identify your draw schedule and understand how construction mortgage draws work, you can be confident knowing Eric’s Homes will only be paid as we make progress towards your new dream home’s construction.
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1 Feinstein, C., & Feinstein, C. (2023, February 15). ‘We have to wake up here’: Canada must build record number of new homes to keep pace with immigration, report. thestar.com. https://www.thestar.com/business/2023/02/15/we-have-to-wake-up-here-canada-must-build-record-number-of-new-homes-to-keep-pace-with-immigration-report-finds.html#:~:text=The%20country%20is%20set%20to,units%20this%20year%2C%20it%20added.