What is the difference between a Completion Mortgage and a Draw Mortgage?
Buying a new home means going through several different steps before you walk in the front door, and one of those steps is getting a mortgage. There are two types of mortgages that builders use, a Completion Mortgage or a Draw Mortgage; Daytona Homes prefers to work with a Draw Mortgage, so let’s take a look at the two.
A Completion Mortgage, simply put, is where Daytona receives the proceeds from the mortgage on the day of possession. Simple enough right? When you receive an approval on a completion mortgage, typically the rate that you are receiving is good for a period of 4 months (120 days). Some lenders and some rate promotions may have a shorter period for the rate guarantee. If your possession date is within the rate hold period, then your rate is locked in, and funding of the mortgage will continue as per the noted possession date.
What happens if you are building a home and it takes more than 4 months?
This does occur on a custom or pre-sale home, therefore your rate may not be locked in. Your mortgage application will be fully underwritten by the lender (and insurer if applicable) and you will be provided a mortgage commitment, however, the rate, in most cases, will not be locked in and guaranteed until you are within 120 days from possession of the new home. Quite often, there will be a condition in the approval that is “Subject to Employment and Credit Re-Check”. This means that at the time of locking in the rate, you may have to provide updated paystubs as well as your bank or broker may have to do a new credit check to ensure there are no new debts added to your application.
With a Draw Mortgage, Daytona Homes can access the mortgage proceeds during construction. That means, you will be approved for your mortgage and offered a rate that will be held for a time range of 90-180 days. While you are finalizing the details of your new build, Daytona will be ordering permits and starting construction. All the conditions that may have been on the original mortgage commitment must be fulfilled as well getting your lawyer for the mortgage to be “Draw Ready”. Once your home has reached a certain stage, Daytona can request funds via a draw on the mortgage which will then lock in the rate for the remainder of the build and the length of the term on the mortgage
If there are any additional upgrades that are done to the home that you want included into the mortgage, this will need to be added via your bank or lender prior to signing final documents with the lawyer. Otherwise, these additions will need to be paid out of pocket upon possession.
Do I have to pay interest on the money taken from my mortgage?
Daytona pays the draw interest. The builder receives 3 to sometimes four payments/draws throughout the build. There are no disadvantages to the buyer in this case, especially if the first draw locks the client into an current mortgage rate, with the likely scenario that rates increase in the upcoming year.
Even though the mortgage is being activated/funded prior to possession, there really isn’t much difference between a Draw Mortgage and a Completion Mortgage other than you will be signing the documents with the lawyer early in the process. You will not be required to make a mortgage payment until you move in, and you have the opportunity for a guaranteed rate during the course of construction.
If you are ready to get started, we can help. Please visit a sales consultant, or if you prefer contact your bank or a mortgage broker.
