Everything you Wanted to Know About Raw Land Mortgage Financing
Are you considering building your own home? In this article we’ll talk about raw land mortgage financing and how it can help you do just that.
Financing: Existing Home vs. Building Your Own Home
To understand raw land mortgage financing, it helps first to discuss the difference between getting a mortgage on an existing home versus getting one when you’re building your own home.
When you purchase a resale home already built, you can put as little as 5% down. The timing of when the money changes hands is key. The money you’re putting down is advanced to your lawyer, typically a couple of days before your closing day, along with the mortgage funds to make up the purchase price balance. This differs from raw land mortgage financing.
With raw land mortgage financing, the mortgage lender that you work with doesn’t advance you the funds ahead of time to buy the raw land and develop it (aka build a home). Instead, the mortgage lender will only advance your funds once work is completed.
It’s important not to confuse mortgage financing on new builds with raw land mortgage financing. With a new build, you’re making deposits at scheduled periods leading up to the closing day. Beyond that, the builder only receives the balance of what they are owed at closing.
This is unlike raw land mortgage financing, where the builder is paid at various stages of completion of the construction of the new home. This is known as raw land mortgage financing or a construction mortgage.
Serviced vs. Un-serviced Lot
Before buying a lot, you’ll want to know if it’s serviced or un-serviced.
In simple terms, a serviced lot is one that is on the grid. That means it has access to all the necessary utilities, including heat, hydro and water. An un-serviced lot is one lacking utility connections.
Something to be aware of is that lenders tend to view them as riskier with an un-serviced lot. As such, you may be required to put down more funds. For example, on a serviced lot, you may only need to put down 25% for the lot, while you may need to put down 50% with an un-serviced lot.
You may also be looking at higher mortgage rates for an un-serviced lot and qualifying for a lower maximum mortgage amount.
As mentioned, construction or raw land mortgage financing is different than a traditional mortgage. The lender only advances you the funds when the work is completed. That means that you have to have the funds to get to each construction stage. Builders are willing to work without full payment and only need a deposit, so this works fine. You’ll need to be able to finance the deposit yourself from your resources.
It depends on the lender, but the key stages could be: backfill, lock-up, paint-ready and complete. Inspections are typically done at each stage to ensure the work is completed satisfactorily before the lender releases the funds.
Construction mortgages tend to have higher rates than traditional mortgages, but it’s only a temporary solution. Once your new home is constructed, our mortgage experts can help you refinance into a traditional mortgage with lower rates.
The Bottom Line
Are you interested in learning more about raw land mortgage financing? Reach out to our mortgage experts today and we’ll be happy to guide you through the process.