I have had a lot of questions from realtors and their clients regarding the way mortgage lenders treat purchasers of new build homes in Ontario. There are some key points that are different for new builds than existing ones that I would like to point out. I’ll structure the discussion chronologically.
Typically your builder will ask that you bring in a pre-approval as part of your signing the purchase and sale agreement for a new build. This is different than buying an existing home because new builds often close months and sometimes years down the line which usually extends past the validity period of a typical pre-approval. For my clients I have written letter of pre-approval in house and had them accepted but I have run into the odd time where a builder requires the pre-approval from their on-site mortgage lender. You’re never locked into anything with a pre-approval, so its no issue to get one from their exclusive lender and then find the best mortgage for you close to your closing.
Borrowing for the deposits
You will not find that a mortgage lender will lend you money for the deposits on a new home or an existing one for that matter. Lenders are only able to offer mortgages using real property as security. If you don’t have the title yet, you can’t get a mortgage. That being said, it is very popular for folks to use a line of credit or other similar loan to put down some of their deposit money and spend time paying it back before closing.
Buying an assignment
If a builder permits assignments, you may want to buy or sell one as part of your financial plan. Financing assignments is possible but the choices are limited. Some lenders will only finance the original purchase price and some even require that the assignment be to a family member or non-arm’s length person. The mortgage broker industry does have lenders that will lend on the appraised value, which is why you should have a talk with a broker (me of course!) in a case like this.
Finishes and other add-ons
Many builders leave the door open to buyers to select finishes and add-ons later in the construction phase of the build. If your builder is able to, always request that they amend your agreement of purchase and sale to include these finishes, and the mortgage lender will gladly finance them.
Appraisals for new builds usually occur in the final two weeks before closing because that’s when the property is complete enough to have an appraisal. Typically lenders require that the property is 97% complete for it to be appraised and of course 100% complete for when the loan is advanced.
Builder’s development fees and adjustment costs
Many people are surprised by the fact that mortgage lenders typically do not finance any of the final adjustment costs. The rule of thumb is that if it is not a component of the purchase price, it will not be financed. This is important because some contracts can allow for tens of thousands in final adjustments that need to come out of your pocket to close the deal. Make sure you and your lawyer have discussed the total amount of funds required to close the deal.