Pre-Construction Condo Mortgages: All that You Should Know About Financing
Buying a residential property is not an easy decision to make. It’s a major decision that takes time and you’ll need to consider a lot of things before proceeding. Out of the various aspects, financing is a factor that needs proper weighing of the pros and cons of every option available. Are you planning to buy a pre-construction condo? Wondering how you can get a mortgage on a pre-construction condo? What is the process? If you have the above questions in mind, this post is for you.
Mortgage pre-approval for a pre-construction condo
Many condo buyers often wonder if they need a mortgage pre-approval for a pre-construction condo. The answer is Yes. The condo developer requires a mortgage pre-approval to make sure that you will not default and have the affordability to finalize on the property later. However, as the building comes closer to occupancy or 80%, the builder may lift up some of the financial restrictions. Generally, the Toronto condo builders will need this mortgage pre-approval within a period of 30-90 days from the day of purchase.
However, we recommend buyers take the pre-approval in the cooling period because, during this period, any trouble with financing would be clarified, and the buyers will have the chance to back out their purchase without any obligation.
Understand the Cooling Off Period
Buying a condo is not a regular purchase. It is a big decision, and you might have second thoughts later. If you have signed on the papers, but after that changed your mind because of any reason, e.g., lack of funds, you can still back out without any questions, but only within a limited time. This limited-time is called the cooling-off period. This period is generally 7-10 days long, depending upon the area where you live.
Factors That Affect a Buyer’s Eligibility to Get a Mortgage
There are various factors that can affect a buyer’s ability to get a mortgage. It’s important to know these factors in advance and try to get a triple AAA rating. The factors include:
- Credit Score
- Income to Debt
- Income History
Duration of Time When Banks Offer Rate Guarantees
Banks rarely honour interest rate quoted on the mortgage approval if the pre-construction condo is closing after 3+ years. In such a case, it’s better to get the MPA from the most relaxed source and again get in touch with a broker later during the closing to look around for alternative options. If your condo is ready in 2 years or less, look for a commitment letter. This will lock-in the prevailing interest rates and will give you the security of a rate guarantee.
Mortgage Commencement on a Pre-Construction Condo
The mortgage loan starts on the condo’s final closing and not on occupancy. To make the terms clear to you, here is a detailed explanation.
Occupancy is the time when your condo unit is ready, and you are given the right to move-in. However, at that time, the building is not completely ready, and the title of ownership is not transferred yet. Only when the condo building gets registered, your condo unit’s title is transferred to your name, this is referred to as ‘Final Closing’.
In general, occupancy takes place around 3 to 6 months before the final closing. For the period between occupancy and final closing, what you pay to the builder is occupancy fees and not mortgage payments. The moment you receive the title to your unit at the time of the final closing, your mortgage will start.
Mortgage Pre-Approval and Financing Guarantee
Some people have the notion that mortgage pre-approval guarantees financing. Unfortunately, that’s not the case. Mortgage pre-approval is for a period of a maximum of 120 days, after which the terms and conditions need re-negotiation.
Understand the Closing Costs
Buyers often think that it is only the resale unit that has the closing cost, but that’s not actually true. Closing costs are associated with pre-construction condos too and range from somewhere between 1.5% to 4% of the purchase price. This may include condo inspection cost, lawyer fee, land transfer tax, development and education charges, installation charges of various facilities like water, gas, etc. Though these seem minor, together they make a substantial amount that is to be paid. It is important to clarify such costs with the builder beforehand.