What is a construction loan?
Construction loans are generally written as a land and construction loan where the lender will provide a loan to cover the cost of purchasing the land as well as the building of your new home.
How does a construction loan work?
Construction loans are normally drawn down in stages to cover the progress that the borrower makes on his new home.
Payments are normally drawn down in a number of stages. They are:
-
Frame – when the frame, brickwork, roof and insulation are completed.
-
Lock up -when the new build is secured by windows and doors.
-
Second fix – when the internal walls, ceilings, kitchens, bathrooms etc. are completed
-
Completion – installing of appliances, fittings and painting.
The funds are paid directly to your builder as per the contract at completion of each stage. Typically, your lender will require an inspection at the end of each stage to ensure that the construction project is going to plan.
How do I get a construction loan?
A construction loan is different to a standard home loan and home loan providers are more cautious when assessing the risks.
Therefore, the application process is a little more complex than a standard home loan.
In order to have the best prospect of being approved and getting the best construction loan deals you should:
Choose the right construction loan lender
It’s a good idea to shop around for the best rate with multiple lenders. This is where we can help. Yellow loans can give you the inside track on where your best construction loans are and which lenders are the most flexible.
Check your credit history
As construction loans pose more risk to lenders, there policy is to approve construction loans to applicants that have a good credit rating. Before applying makes sure you catch up on any debts and cleaning up your credit file will improve your prospects of a successful construction loan application.
Prove your ability to save
Having saved a deposit will provide evidence of your ability to save and budget for future regular expenses. Most construction loan lenders will require 3-6 months bank statements to prove genuine savings. You can also arrange a deposit by using a guarantor, who can use equity in another property to act as security for your construction loan. You will still need to prove your ability to pay the future repayments on you home loan.
Prove your income and employment history
Proving your ability to be able to afford future repayments is a key component of having your construction loan approved. The construction loan provider will review your income and verify your employment history. You will need to establish a steady employment history with regular wage payments verified on your bank statement as well as with your pay slips and group certificates. Construction loan lenders will need to confirm that you can afford to service the loan repayments once the construction loan shifts from an interest only to principal and interest.
Provide approved construction plans
Your construction loan provider will require details approved construction plans to ensure that the value of the completed property will not be lower than the combined loan size (land and home). As well as council approved construction plans you will also need to provide your builders contract, builders insurance. Your builder will also have to provide their building licence.
How do construction loan repayments work?
You will only be charged interest on the construction part of the loan as the lender will make payments directly to the builder in installments.
Once construction is complete and all payments have been made in full to the builder, you will commence principal and interest payments on the loan. If you have a loan for land purchased, you will have the option to combine both loans into one home loan package.
What happens when my new home is complete?
Once your construction has been completed your lender will arrange an inspection to confirm that the property has been completed to plan in order to be able to value the property.
Once this has been finalised you will have the option to combine your construction loan with the loan you used to purchase the land. Once combined, your loan repayments will include principal and interest.
What's the Yellow Line?
Obtaining construction loans is a great way to be able to purchase in new and upcoming suburbs with home and land packages as well as in established suburbs where building a new home is your dream.
Buying a home is likely to be the largest financial decision you will make. There are a vast range of products and banks are extremely competitive. It is best to seek professional financial advise to ensure you obtain the most appropriate home loan product for your needs.
Yellow loans has a vast range of lenders with a range of products to achieve the best results on obtaining the best home loan deal for you. You can contact us here and we can get your future looking bright.