How to get a loan for construction
Are you thinking of building a new home? But are you confused about how to apply for a construction loan? We offer tips and tricks on how to apply.
A construction loan application is different from a loan to buy a house. You will also need to show proof of your financial status. A building contract that details the construction stages as well as the drawdown schedule is required. Construction loans are only paid once each stage has been completed. The lender will need to know the estimated build time and final costs, as well as a copy building plans.
First, apply for conditional approval
We recommend that you apply for conditional approval before you hire a builder to avoid disappointment. This will ensure that you don’t waste your time researching options and won’t spend too much on packages that are not within your budget. Your lender will assess your financial situation and give you an estimate of the amount you can borrow to conditional approval. You should note that conditional approval can only be granted if the property is valued by the lender. Usually, conditional approval lasts for 90 days.
After you have received conditional approval, it is time to search for your licensed builder, designer, and land. It’s a good idea, even if you have conditional permission, to include a finance clause with your offer to buy contract. This will cover any unexpected problems that may arise during the formal approval process.
Documents needed for a construction loan
You will need documentation detailing the construction to be able to move forward with your application for a home loan and apply for formal approval. While this will vary from lender to lender, most lenders will require the following:
- A signed copy your fixed-price, HIA-compliant building contract
- A schedule of progress payments
- The Council approved the plans and specifications for the construction.
- Work quotes not included in fixed price construction contracts
- Copy of the builder’s license
- Copy of the insurance policy for the builder
What is the process of progress payments?
Contrary to traditional home loans, which pay out a lump sum upon settlement, constructions loans are paid in stages. The approved progress payment schedule stipulates that the builder receives the first installment. Before releasing funds, your lender may require inspections of each stage. This information will be included in the terms of the home loan documents.
Your lender will keep in touch with you throughout the process to inform you when progress payments are requested and when they have been made.
Interest on a construction loan
Your type of construction loan and its terms and conditions will determine the interest rate. Many construction loans come with an interest-only repayment period. As you only pay interest on the amount of the loan, this makes it easier to manage your payments while your home is being constructed. Repayments on a typical construction loan will revert back to principal and interest once the final payment has been made. Each loan’s terms are different so make sure you read your contract before signing.
Get more information about construction loans by downloading our guide, or contact an emoney loan specialist to help you select the right loan for your situation.