How Do Mortgages Work In Pre Construction?


Common questions about mortgages and buying a pre construction condo include:

  • Do I need a pre-approval to get a pre construction condo?
  • How do I go about getting a mortgage?
  • When do I need to get a mortgage?
  • Do developers require a specific lender(s)?
  • How does the deposit work vs. a downpayment?

Today’s post will focus on these questions to help steer you in the right direction!

Do I Need A Pre-approval To Get A Pre Construction Condo?

This all depends on the developer and the specific project, but most developers will require at least a letter of intent from a mortgage broker.

When a project is 3 or 4 years out from being completed, it is hard to project your finances into the future. Developers may ask for a letter of intent, where a mortgage broker has taken a look at your finances and signs off that you qualify and/or going to be comfortable with obtaining a mortgage by the time of completion of the project.

Some developers will ask for a pre approval from a lender (in some cases from a particular list of lenders – typically A lenders like the big Canadian banks). In this case, you would have to qualify for your unit as if you were taking possession of it now, rather than 3 – 4 years in the future when the project is completed.

How Do I Go About Getting A Mortgage?

The easiest and typically the most effective way to get a mortgage is through a reputable mortgage broker. 

A mortgage broker who knows the industry through and through, has great working relationships with a number of lenders, and is up to date on rates, fees, incentives, and so on, will be able to get you the mortgage that is the best fit for you.

You can go straight to some lenders (i.e. the major Canadian banks or credit unions), but in most cases, you will get a better rate or terms by going through a broker who knows where to push back, deals in high volume, and does this for a living.

The cost of using a mortgage broker: nothing. Mortgage brokers are absolutely free to use, with the exception if you are needing to go through private lenders (if your credit score is not good enough for an A lender or even a B lender).  

Mortgage agents will help you with getting your pre-approval as well, and will help you gather all of the documentation you need that lenders will require.

When Do I Need To Get A Mortgage?

Your mortgage loan starts upon the final closing of your unit. This may or may not line up with your occupancy date.

To clarify things: your final closing is when the building is fully finished by the developer, and the building has been registered and your unit’s title is transferred to your name.

At that time, your full payment for the unit is due. Meaning, you need to get a mortgage (unless you are paying everything outright with cash). 

So, you need to have your mortgage lined up for this date.

Which means you need to give yourself enough time to shop around for a good rate, the right product, as well as time to gather all of the documentation you need, etc.

To be safe, it’s a good idea to give yourself a couple of months at least before final closing.

And once again, using a mortgage agent can be incredible valuable – and make your life a whole lot easier – during this whole process!

Do Developers Require A Specific Lender(s)?

Only very rarely will some developers require you to use only lenders that have been specified by them – and this will be outlined in your Agreement of Purchase and Sale.

Most developers are flexible on this, and will be fine so long as you provide a mortgage commitment from a mortgage agent, or any A or B lender. However, some developers will provide a list of lenders (or just one, in some cases) that you will be required to get a mortgage pre-approval from.

Lending institutions in Canada have a great reputation – and B lenders are backed by A lenders in most cases – so this practice of specifying a specific lender is increasingly rare.

How Does The Deposit Work Vs. A Downpayment?

These two terms are used interchangeably in the world of pre construction.

A downpayment can be considered the total deposit made towards your unit before you move in. So, a downpayment is made up of multiple deposits.

Your downpayment is made up of a deposit structure. A typical downpayment will be 20%, and a typical deposit structure would be something along the lines of:

  • $5,000 with the offer
  • Balance of 5% due in 30 days
  • Next 5% in 90 days
  • Next 5% in 180 days
  • Final 5% at occupancy

There are some projects which will have 15%, 10%, or even 5% downpayments, but 20% is the most common.

When you take possession of the unit, you will pay for the remaining amount typically through a mortgage.

Conclusion

When you’re starting the purchasing process for your pre construction unit, you typically only need to worry about getting a pre-approval, or a letter of intent, lined up.

It’s really only when you are getting closer to your final closing date that you need your mortgage in place.

Having a pre-approval in pre construction, however, is always a good idea before you even start looking for units as it gives you a really solid idea of what you qualify for. This can be especially helpful so you avoid any surprises further down the line – and it removes a lot of the stress and worry from the whole experience!

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