What is a construction loan?
Building your own house can be a exciting and enjoyable experience. However, things can go wrong and can turn your exciting adventure into a stressful and expensive process.
Most people cannot afford to pay for the cost of the land and the construction costs of the new building and require finance.
Financing a construction project is different from a normal home loan as the bank is lending for something that is not yet built. To manage the risk of lending for a building that is to be constructed some lenders offer special construction loans that have conditions around the construction that need to be met in order to qualify and for funds to be released.
Need a construction loan?
Our mortgage brokers can assist you to compare different construction loans and assist in the application process. Contact us to talk to a mortgage broker about a construction loan.
Some of the considerations when getting a construction loan
Banks and lenders will typically have a set of criteria about the construction, how it is to be completed and when they will release funds.
For example most lenders will require that you engage a registered builder with a fixed price contract. This way they know that the builder is qualified and registered and that the price to the completion of the construction is known and agreed at the start. Furthermore, most lenders will effectively make you reapply if you have a variation to the building that requires additional funds to be borrowed.
Some lenders will approve owner builder home loans but usually only to people who are experienced registered builders that are building their own project.
The lender will require detailed specifications including comprehensive floor plans and details about the construction materials.
The lender will also usually get a property valuation from an approved appraiser. The appeaser will go through the specifications of the construction contract and building specifications and determine an estimate of the end value of the construction with the associated land by comparing to other properties with similar specification and features in the area.
You will also need to provide a deposit. Now days for owner occupiers many lenders are offering loans of up to 95% of the property value for construction purposes with the same interest rates as normal home loans.
As with all home loans you will need to demonstrate to the lender that you are able to make the repayments on the loan. To do this the lender will consider your income, other loans payments and your expenses. The lender will also need to assess your assets and liabilities position.
Providing that you meet all the lender’s requirements and have good credit, you should be able to get a construction loan.
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