Financing The Purchase Of A New Home From A Builder

Buying A New Home From A Builder
August 26, 2008
Buying A New Home From A Builder (Part 3)
December 12, 2008
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Financing The Purchase Of A New Home From A Builder

Get a Pre-approved Mortgage 

If you plan to finance your new home purchase with a mortgage loan, it would be prudent to meet with a mortgage broker or mortgage specialist in advance and discuss your financial situation and get mortgage pre-approval.  Pre-approval simply means that your lender has committed to giving you a mortgage loan up to a certain dollar amount, on certain terms and commitments, at a specified rate of interest. This commitment usually is valid for a certain period of time.  A pre-approved mortgage will allow you to negotiate with the builder of your choice on the price and the type of upgrades or options you want, with the comfort and knowledge that you have already put the necessary financing in place and know what you can afford.

If you choose to have the builder build your new home as opposed to buying a pre-built or spec home, the building contract may require progress payments at various stages of construction. You should discuss with the mortgage broker or mortgage specialist, the requirement for a construction mortgage as opposed to a completion mortgage.

Conventional versus CMHC Mortgage

You should discuss with your mortgage broker or mortgage specialist the difference between a conventional mortgage and a CMHC mortgage and the advantages and disadvantages of both.

Generally, a CMHC mortgage refers to a mortgage that requires Homeowner Mortgage Loan Insurance. Typically, lenders require mortgage loan insurance for loans made to anyone that wishes to purchase a home with a down-payment of less than 20% of the purchase price. The Canadian Bank Act prohibits most lending institutions from providing mortgages without mortgage loan insurance for amounts that exceed 80% of the value of the home or purchases with less than 20% down payment.

Through your lender, CMHC Mortgage Loan Insurance enables you to finance up to 95% of the purchase price of a new home, with an amortization period of up to 35 years, as opposed to the typical 25 year amortization period for conventional mortgages. There is, however, a cost associated with this type of mortgage insurance. The cost of the insurance or the premium is paid by the borrower, usually by adding the amount of the insurance to the principal amount of the mortgage loan, which is then deducted at the time of the funding. The result is that this portion of the loan amount is paid back with interest over the term of the mortgage loan.

On the other hand, a conventional mortgage does not require this insurance component but is only available if you can afford a down payment of 20% or more on the purchase price of your new home.

There is also another important difference. All mortgages contain an express covenant to repay the loan. Under the Law of Property Act of Alberta, if the borrower defaults and the lender is forced to foreclose and sell the property, the lender or bank’s remedy is restricted to the land. In other words, if the lender or bank forecloses and sells the property and there is more owed than is realized from the sale of the property (shortfall), the bank cannot pursue the borrower with respect to the shortfall. There is, however, an exception and that exception is a mortgage granted under the National Housing Act or a CMHC mortgage. So, conversely, if the lender or bank were to foreclose and sell the property and there was more money owed than realized from the sale, the lender or bank has the right to sue the borrower personally to recover this amount.

More importantly, if you sell the property and the buyer assumes the CMHC mortgage, you may continue to be liable under the promise to pay contained in the mortgage in the event of their default, even though you no longer own the property. If you sell the property and the buyer puts on a new mortgage, then the CMHC mortgage is paid out and there is no longer any potential liability. You should discuss with your lawyer how to avoid the potential liability if you sell your new home and the buyer assumes the CMHC mortgage.

Pritchard and Co
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