Building a house…?
What are the different types of construction loans out there?
As with all forms of lending for housing, getting a loan to fund a build can be a complicated and tricky beast. There are different options when building and meeting requirements. We’ll just talk about one or else you could still be reading about it half an hour later ;)
Fixed Price Construction Loan
This is a loan with progressive drawdowns when required by the builder. These are not like a standard mortgage as the bank or lender is lending you money for something that does not yet exist.
Another difference is that the term is shorter than the standard 30 year term. The construction loan term is generally around 1 year (this is to get the house built) then once the house is complete, you will need to restructure your construction loan and enter into standard fixed rate mortgage terms.
How to qualify for one…
Banks and lenders impose very strict lending requirements as a LOT of trust is being placed on the building company. These are:
• You must be involved with a Qualified Builder – this can hinder your efforts if you are intending to build the house yourself.
• The lender will need detailed specifications – this is a comprehensive list of ALL prices of materials and components to be used in the build. Also you should have little or no Provisional Cost Sums which are costs that are not known at the time of confirming the contract.
• You must get a registered valuation from the floor plans and other details the builder will provide. The land value will also be taken into consideration. At completion, another registered valuation may take place.
If you meet these criteria and can show good account conduct across all accounts, and your income has been assessed to ensure you can meet the mortgage repayments, you should qualify for a construction loan.
What happens once I have one…
You don’t get the whole lot at once, you get a series of progressive drawdowns that is negotiated between the lender, the buyer and the building company.
The bank can ask for an assessment/inspection at each progressive drawdown to ensure the money is being spent as it was agreed and before being released to the building company.
The interest rate for a construction loan is normally a floating rate interest only and you also pay on the amount that has been drawdown – not the whole amount to make managing the repayments easier. The interest rate will not typically be the same as a standard mortgage.
What are the risks?
• The build may not be completed in the timeframe that is set and within the set budget. This could mean you have additional costs such as paying 2 lots of mortgage/rent and there could be bank fees if you need to extend your loan.
• The house may not be worth what it was valued at initially once completed. This could be due to poor workmanship on the builders part or a downturn in the housing market. Either way it would cost you as you would have to come up with the difference.
• You might not qualify to get a loan to pay off your construction loan at the end! This would only happen if your income or financial situation changes significantly – but a construction loan is not designed to be permanent so at the end of the build, the balance HAS to be paid off. If this can’t be refinanced, you could lose your brand new house before you’ve even had a chance to enjoy it!
The Craigs have a wealth of knowledge surrounding Construction Loans and can answer any questions you have. It’s a complicated process but we are here to help and our advice is FREE!