Are you working with a new home builder and they are asking for a "Draw" mortgage? Do you and your client fully understand what that means?
Many new home builders will ask for a draw mortgage on homes that are yet to be built as this helps their internal cash flow within the company. A draw mortgage means that the builder will be constructing the home on the purchaser's mortgage however, the purchaser does not begin to make payments until they have possession of their home.
The purchaser will apply for a mortgage the same way as usual with the exception of them requiring a 'draw' or 'construction' mortgage. Once the mortgage is approved, the commitment will have a 90-180 day rate hold period (lender specific) and the builder will commence construction of the home.
During certain stages of construction, the builder will request a draw on the mortgage funds from the lender, which will include an inspection by the bank to verify the stage of construction. Once the first draw is completed, the rate is locked in for the purchaser for the remainder of the mortgage term.
- The purchaser will meet with their lawyer to sign mortgage documents prior to the first draw request.
- Ensure the purchaser and the builder is aware of the initial rate hold period and that the builder completes the first draw within that timeline to avoid possible rate increases.
- Ask the builder who is responsible for the interest on the draws during construction - Many builders will pay for the interest during construction and the lender will need to be aware of that.
- If the builder is paying the interest, have your client verify if the interest is billed direct to the builder or if it will be deducted from their account personal account, therefore being responsible to get reimbursement from their builder.