What is a Construction Loan?
Building your own house can be a delightful and fun experience but it can also be a long and expensive process. A Construction Loan can be given by a bank or a lender and the borrower will be required to meet a certain criteria or requirements so he / she will be allowed to avail the construction loan. This loan will be ideal for People looking for a perfect location where to build their dream house. This type of loan can also help people funding the renovation of their old houses. If you are planning to renovate your house and sell it afterwards, construction loan can help you fund the expenses.
When is the right time for you to apply for a Construction loan?
- If you currently own a house and lot or you are planning to acquire land and build a house on it.
- If you are planning to have a major renovation on your existing home.
- If you are an investor that wants to finance a construction of a residential project.
How do construction loans work?
The accessible funds for the construction will be drawn down in a progress payments which will be paid to your contractor or builder. This way you will only be charged if the interest on the funds is being used, reducing the interest charged. In the early stages of construction, you will first be required to subsidize your own funds towards the construction cost unless the total construction is being funded by the lender or a bank. The funds currently available in your loan will be used for the construction and to complete the project
Note: if you’re qualified for the First Home Owner Grant, the grant is only available once the slab has been completed.
What are the needed documents to be submitted before progress payments can be made?
Most of the lenders and banks will require you these documents:
- A copy of your builder’s license.
- A copy of your builder’s insurance policy.
- A copy of your executed fixed price HIA/MBA building contract, which must include all the components of the construction.
- A copy of the council approved plans and specifications.
After accomplishing all the needed requirements your chosen lender or bank will now process the progress payment.
Do I qualify for a construction loan?
You need to fulfil all these requirements for you to be able to qualify for a construction loan.
- A qualified builder is a must – A competent builder is a licensed general contractor with a well-known reputation for building quality homes.
- The lender needs thorough specifications – This includes floor plans, as well as details about the materials that are going to be used in the home.
- The home value must be estimated by an appraiser – Although it can seem hard to appraise something that doesn’t exist, the lender must have an appraiser considering the specs of the house and its blue book, as well as the worth or value of the land that the home is being constructed or built on. These calculations are then compared to other similar houses with similar locations, similar features, and similar size. These other houses are called “comps,” and an appraised value is determined based on the comps.
- You will need to put down a large down payment – Typically, 20% is the minimum cost (most lenders) you need to put down for a construction loan – some lenders require as much as 25% down payment. This will make sure that you made your compromises by investing in the project and won’t just walk away if things do not end well. This also protects the bank or lender in case the house doesn’t turn out to be worth as much as they expected.
Find out everything that you ever wanted to know about the construction loan approval process.