Draw Mortgages Explained: Let Home Construction Begin
Draw mortgages often take a lot of time to package and many of us avoid them since we believe the payoff is the same as more efficient purchases and refinances. In these times of competing market share, why discount a market segment who has a significantly greater need for our help?
Draws are an excellent way to diversify your offerings and build your customer base. Providing the expertise and options/solutions for customers to build their home is a solid foundation for a long-term relationship.
The most common reasons for avoiding draw mortgages are that they take a lot of time to put together, the fee incentives are no different and the lender keeps the customer.
Few reasons to avoid a draw mortgage:
The most common reasons for avoiding draw mortgages are that they take a lot of time to put together, the fee incentives are no different and the lender keeps the customer. We explain this more below:
1. It takes a lot of time and effort
It’s true, Draws are more complicated than regular deals. However, if you use a lender who has years of experience with Draws, they will guide you through the process. The more you learn about the packaging process, the more efficient you’ll become at putting these deals together. As a draw expert, your role will be to advise, inform and package the initial deal, while the responsibility for documentation and meeting ongoing requirement rests with your customers.
2. It’s a lot of work for the same payoff
Fees and pay structure varies by lender. Shop around to see if they pay a separate finder’s fees for the draw (construction) term and end term (when construction is done and it becomes a standard mortgage). If so, you’ll get paid twice!
3. Once the build is complete, I relinquish control of my customer to the lender
This goes hand-in-hand with point 2. Unless the lender allows the customer to switch lenders for the end term, this is an opportunity for you maintain control and even strengthen the relationship by finding them the best deal on the market.
Bridgewater Bank has an insured draw solution that addresses these reservations because we created The Progress Advance Mortgage (+Land)™ with brokers in mind. Here are some features that set it apart:
While most lenders focus on residential home builders or contractors, BwB understands there are DIY people out there who want to build their own homes and deserve financing to do so.
Customer control & your opportunity
We give you the freedom to switch to another lender without penalty upon completion of the build. We understand there may be better terms for your client/customer offered at this time, so we don’t want to tie you down.
What’s more, if you do switch upon completion, we’ll compensate you for your hard work in the draw phase:
- For mortgages under $300,000 you will earn a finder’s fee of $250
- For mortgages $300,000 and more, you will earn a finder’s fee of $500
So you get control of your customer, compensation for the work you did during the draw term and compensation from another lender if you switch at the end term.
Support & Service
Our underwriters have been doing draw mortgages for years. Their goal is to help you and your customer build their home. Their understanding of insurers’ requirements and paperwork make them an invaluable tool if you don’t have a lot of experience in this area. They will guide you through the process, making it as painless as possible.
Do you have any suggestions on how to grow draw business? We’d like to hear them in the comments.
For Brokers: How Bridgewater Bank’s construction draw mortgage can help your clients
We’ve already identified that being a Draw Mortgage expert can help you stand out from the competition. Now let’s talk about how Bridgewater Bank can help support your expertise.
Prospecting Draw Customers
The average broker’s portfolio includes 10% to 25% in new construction loans. The customers you can help, and want to target, are those who want to build their own home. We finance owner-occupied new construction by residential builders, general contractors and unlike many others, self-builds. Boutique builders fit into this category too.
You can find these clients by sourcing smaller, contract builders in your area and creating relationships with realtors selling land. We do loans for single families up to a 4-plex, so don’t overlook investor types. We are one of the few lenders that will loan on modular and mobile homes and we will build on acreages. Your reach can be urban and rural.
Why you should choose Bridgewater Bank for your owner occupied new-construction customers
- We are good at them – We are seasoned draw experts and we will make you one too.
- We are competitively priced – The flexibility of our program ensures your customer has access to the best priced solutions to meet their needs.
- Your customer can switch at completion – We are the only chartered bank that allows this flexibility. Maybe your client is a BwB draw customer, but not a BwB fixed-term customer. We know we have our niche. We insure your construction loan, so that you have options at completion and your customer can stay with us or switch without penalty to a mortgage that suits them.
- Get paid extra for your efforts – Our program allows you to get paid for the draw portion and the completed mortgage placement, while representing your client’s best interests. When you switch your client at completion, we will pay you a flat fee and your client has access to the open market to get the best rate on their fixed term.
- Your client never visits a bank branch – You’re the expert. We make sure you have the information you need when the client visits YOUR office.
- Common sense draw amounts for four build stages – There are no wide gaps of funding. We ensure your client has access to funds as you need them and a backup plan when marble counters suddenly look better than laminate.
Now you’ve got your customers, lets package up that deal.
Packaging draw deals is all about getting solid (planning) documentation upfront. Boutique builders will have no problem gathering this information, given you provide clear instructions. Your customers who are doing self-builds may require a little more hand holding and possibly some expectation management to understand the process.
Here are some considerations Kara wants you to remember:
“To begin underwriting for a draw, the following documents should be obtained in all cases:
- Cost to construct – This might be a construction agreement, self-build worksheet with supporting quotes, contractor’s agreement or purchase agreement for a mobile/modular.
- Land value – This can include an offer to purchase for land, property tax assessment, appraisal or recent title. If the house is being built by a builder, we need the breakdown of the cost to construct vs land as often it’s not laid out in the agreement and will need to be disclosed to the insurer.
- Draw schedule – We check for a draw schedule outlined in the documents and see how it mirrors the insurer and our processes.
- $$$ MONEY $$$ – This includes the kind of resources the client has to cover cost over runs or carry the project draw to draw.
Since every build is unique, our underwriting team also looks at location, disclosed properties, other insured mortgages, builder qualifications, NHW or provincial equivalent, permits, plans and specifications, startup documents and double-quoted costs… just to name a few. Browse through our Schedule C Document Checklist. It has a guide for what’s required in terms of basics for the self-build vs NHW build.”
Building a home is a consuming process for your client that can be stressful. We are here to answer questions and provide support for our brokers, so you can create clear expectations for your customers.
With new construction, there are bound to be changes to plans and some road blocks along the way. Unlike other loans, there is no quick turn-around with draw mortgages. However, we have been through it all – a few times – and we know what to do when issues come up.
Whatever challenges and obstacles you face, BwB’s experienced underwriters will work with you to get the deal done every step of the way. In fact, we may become good friends over the next 3 to 10 months. Time invested is time well spent (not only with us), but with your customers who will sing your praises to all their friends!
Do you have any questions about our draw program? Would you like to chat with our BDMs or underwriters? Leave us a comment below and we’ll get back to you!