Planning to apply a construction loan for building your own home?
Construction loans are not as straightforward as simple home loans. There are additional decisions to be made about the structure of the loan, additional documentation is required and the funds are released in a different way.
Documents you will need
You always need documentation about your finances, income, and identity. However, for construction loans, you need to include a building contract for the construction which includes a schedule of payments to the builder, as well as the plans and specifications so that valuation can be performed.
Further documentation will also be required before the first payment is made from the lender to the builder, including a schedule of the payments to be made such as the builders’ insurance details and the final plans that have been approved by the local council.
We will help you each step of the way and keep you informed of the progress.
You can purchase a house and land package where the purchase of the land and the building contract are provided together or purchase the land first and then increase your loan to build your home later. When you buy the land it’s important to set a budget for your construction so the calculations can be done for both the land and the construction. You can be pre-approved for your construction loan at the same time you buy the land.
Funding the construction
Progress payments are made to the builder as each section of the work is completed. The builder then invoices you for the work and you give the approval to the bank to pay the builder. You pay more interest as each payment is made to the builder and the loan gradually increases.
If you are borrowing for only part of the construction and you have a contribution to pay, you must pay your portion first before the bank takes over the remaining payments to the builder.
Any changes to the contract and plans can trigger a re-assessment of the loan, so be as sure as you can be that the plans and contracts the lender sees are final, and it is also worth trying to pay for any small amendments from your own pocket, rather than changing the loan and risking a re-assessment.
Problems can also arise when other work on the site that isn’t completed by the builder needs to be paid for, as some lenders only make the remaining funds of the mortgage available after the completion of construction.
While some builders will include subcontractors as part of the main contract, meaning that they can be paid by the builder as stages of work are complete throughout the drawdown schedule, others will not do this. Again, this may make it necessary to pay from your own pocket. We will go through the process with you so you are fully informed and know what to expect.