Here are some tips to help you get a construction loan
You are thinking about building your dream home, but you aren’t sure how to get a loan. Continue reading to learn how to apply for construction loans.
The process of applying for a construction loan differs from applying for a mortgage for an existing house. Along with proof of your financial position, you will also need a construction contract detailing the construction stages and drawdown. Because construction loans are paid in stages, each stage is paid for as a separate payment. A copy of the building plans, together with an estimate of build time and cost, will be required by your lender.
Request conditional approval first
In order to save disappointment and to help you determine your budget, we recommend that you obtain conditional approval before engaging a builder. By doing this, you can avoid spending time looking at different packages and don’t waste money on ones that are too expensive. Your lender will evaluate your financial situation in order to provide you with an indication of what amount you might borrow. Important to remember that conditional approval may be subject to conditions such as the lender’s valuation. The conditional approval typically lasts for 90-days.
Once you have your conditional approval, it’s time for you to start looking for your land, licensed builder and designer. You should still include a finance clause in the offer to purchase contract, even if conditional approval has been granted. This is to help you with any unexpected issues that might arise during formal approval.
Documents needed to obtain a construction loan
Once you are ready for your loan application to be processed and you apply for formal approval of your loan, you will need to provide documentation to your lender about the build. Although this may vary among lenders, they will usually require:
- A signed copy of the fixed price, HIA compliant contract for your building
- A schedule of progress payment
- Plans and specifications approved by the Council
- Not included in the fixed price contract for building are quotes for work
- Copy of the license for the builder
- Copy of the policy insurance for the builder
How does progress payment work?
Construction loans are not like traditional home loans which pay out a lump amount at settlement. Instead, they are paid out over time to correspond with each stage of construction. According to the approved progress payments schedule, the builder will receive the final installments. The lender might order inspections at every stage of the build before releasing funds. This information is included in your home loan documents.
Your lender will keep your informed throughout the entire process. They will let you know when a payment is due and when it has been received.
Construction loan interest rates
The type of loan you have, as well as its terms and conditions, will affect the interest rate. However, most construction loans offer an interest-only repayment term during construction. Because you will only pay interest on the portion of the loan that was drawn, it makes repayments easier while your home’s being built. After the final progress payment, your repayments will return to principal and interest for a typical loan. The terms of every loan are different, so make sure to read through your home loan contract before you sign.
Find out more about construction loans in our handy guide. Or contact an emoney lending specialist, who will help you choose the best loan for your specific needs.