Do you dream of building your own family home one day? If so, you will need to think carefully about how you are going to finance it and what planning is involved. A construction loan is a very good option; however, the stakes are high, which is reflected in the qualification process and nature of the loan agreement. Read on to find out more about construction loans and how they can make your dreams come true.
What is a Construction Loan?
A construction loan is a short term loan provided to those wishing to build a new property. The money is used to build the property and is released in stages throughout the building process – to cover costs. The loan is usually offered for a set period, around a year, to allow enough time for the build to take place.
When the property has been completed, you have some options with regards to the loan. You can refinance the construction loan and add the amount to your mortgage, or, you can take out a second loan to pay it off. Due to the risks involved, construction loans tend to have a higher interest rate.
How to Qualify for a Construction Loan?
When it comes to lending for construction, banks and lenders are very careful. It’s an investment for them and they need to ensure that the end product will be worth the money and finished to a particular standard. Due to this, they employ strict qualifying criteria to protect their investment.
Firstly, a qualified builder must be involved in the project, or you will have trouble finding funding. The lender will also require detailed plans for your project, blueprints and specifications. There needs to be a valuation of the property by an appraiser, and there will be a large down-payment along with a high-interest loan.
How do Construction Loans Work?
When you have qualified and agreed on a construction loan, you will be granted the funds, but not all at once. The money is released in a series of stages, called ‘draws’ that covers the costs of the building project according to the plans. This further reduces the risk for lenders.
The draws are intervals at which the money is released. The first draw may be released at the beginning of the project, the second draw after the foundations are laid. The third draw may come after the frame is erected and the fourth when it has a roof. The draws can be discussed and arranged in-line with the project.
Disadvantages of Construction Loans
A construction loan can be an excellent way of realising a dream home for your family or building one to sell on. However, you need to be very organised and fully aware of the risks involved. Just as there are risks for the bank, there are also for your own finances if you don’t get things right.
If your home or project is not completed on time, you will probably face extra fees and charges; this is something you want to avoid. With a home build, there is also the chance that the finished product will be worth less than anticipated; this could be due to a drop in house prices or poor workmanship.
Bernie Kyne
Mortgage Consultant
0400141757
bernie.kyne@mortgage-express.com.au
Disclaimer: While all care has been taken in the preparation of this publication, no warranty is given as to the accuracy of the information and no responsibility is taken for any errors or omissions. The content of this article is general in nature and is presented for informative purposes. It is not intended to constitute financial advice nor is it intended to imply any recommendation or opinion about a financial product. It does not take into consideration your personal situation and may not be relevant to circumstances. Before taking any action in relation to the matters dealt within this publication, you should seek professional advice.
