Documents / Downpayment / First Time Home Buyer / Insurance / Lenders / New to Canada / Pre-Approvals / Purchase / Qualifying / Rates & Terms / Rental Properties

Buying vs. Building

If you’re currently thinking about buying a home and you are unsure whether to buy a pre-existing home or building a new one, keep reading for some of the differences between the two which will arm you with some useful decision making material. The best way to avoid costly surprises when purchasing a home is to educate yourself on the different mortgage processes associated with the specific home you have chosen to buy. Below is an outline and a few of the key differences between buying a pre-existing home or building a new home. Of course I always recommend also having a conversation with your trusted mortgage and real estate professionals about your specific needs.

What is the difference?

Buying a pre-existing home, also known as a resale is when you purchase a property that is already built and has been lived in by a previous resident. Whereas, a newly built home is either one you have custom built for you by a builder or you can purchase a home from a builder who offers a selection of floor plans to choose from along with the ability to customize the smaller details like appliance type, paint colors, countertop material etc. There is also a third option called a “self built” home, however, this is a much more complex process which requires superior expertise, experience and time.

One of the key differences between the different options is how you can “protect your investment.” With the purchase of an existing home you would likely have an inspection done initially in order to determine if there are any pre-existing problems with the property that may affect your decision to purchase it. With a new build, there is really nothing to inspect prior to purchasing it, however, one would expect there to be no significant problems in that it is a brand new home. Having said that, what if something wasn’t done correctly during the build and you weren’t aware of it for some time after you moved in? To put your mind at ease, your newly built home will likely come with a New Home Warranty Certificate which can be issued by a number of different providers which protects you in the event something does go wrong with the property, as long as it’s covered under that warranty. Most lenders require the builder to have this 3rd party warranty in place.

When buying an existing property, you would likely use a realtor to facilitate that process for you as it’s the seller of the property that covers the real estate fees. It’s essentially free to you when you use the services of a realtor and it can only be good for you as a buyer to have an experienced professional do the negotiating on your behalf. With a new build, you may choose to work directly with the builder or representatives of the builder in choosing the floor plan, location and all customizations for your new home. Do keep in mind that some realtors work with some builders and can help to navigate some of the other details of the transaction on your behalf.

Financing details

Securing the mortgage financing for the purchase of an existing property seems to be less complicated than that of a new build, however, that alone shouldn’t deter you from purchasing a new build. Again, a little education can go a long way in managing your expectations and preparing you for the process you will have to go through when buying a home. When purchasing an existing property you will provide the lender with a copy of the offer to purchase and the property feature sheet. You will have an agreed upon possession date as well as a set purchase price. The lender will then proceed with your financing request and come back to you with a “conditional approval” as further supporting documentation will be required from you based on your individual unique financial circumstances. Most offers I have seen lately will include a “condition to financing” date which is on average about 5 days after you write the offer. These 5 days will give the lender sufficient time to “unconditionally” approve your financing request after receipt and review of all the supporting financial documentation you have been asked to provide also within that 5 day period. You will know what your payments will be at time of possession as the rate you are given at time of approval will be honored until you date of possession of the new home.

With a new build, there are 2 different kinds of mortgage options available for financing your purchase. The first one is called a “draw mortgage” where the builder you have chosen to work with will require multiple advances of the mortgage funds at specific stages of construction. For example, you will provide your down payment whether it is 5% or 10% of the purchase price or more at the time construction of your new home begins. Your builder will then request mortgage draws throughout the construction process. The “draw” schedule required by your builder is detailed in the purchase agreement you initially signed with the builder and the mortgage rate you will get could be set at the time of the first draw with some lenders. The second financing option is called a “completion mortgage” which is similar to the financing for an existing property, with the exception of a longer rate hold requirement which most likely will be higher than the rate you are able to get when closing within the usual 60-90 days. Under this option, the mortgage is not advanced until the property is 100% complete. This means you would be required to provide the builder with an initial deposit at the time you sign the purchase agreement with the remainder not required until a couple of weeks before the completion date. It is really up to your builder as to which type of mortgage financing will be required.

I would suggest you speak to a mortgage specialist who is experienced in builder mortgage financing if you are deciding to purchase a brand new home as there are many other items involved in this type of financing that have not been mentioned in this article, one of them being who owns the land where the home is to be constructed on.

If you’re looking for mortgage advice, the MortgageGirl is here to help. Call 780.433.8412 or email info@mortgagegirl.ca. Stay in the loop by following @mortgagegirlca on Twitter.

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