What Is A Construction Loan?

A home construction loan is a loan with higher interest that is short-term and provides funds to help you build your residential property.

Most construction loans are for one year.

What Is The Process Of Construction Loans?

Variable rates on construction loans are usually linked to the prime rate. Construction loan rates are usually higher than traditional mortgage loans rates. Your home is used as collateral for a traditional mortgage. If you fail to make your payments, the lender may take your home. The lender does not have this option with a home construction loan. They view these loans as higher-risk loans.

Construction loans have a very short timeline and are dependent on the completion and completion of the project. You will need to give the lender a construction timeline and detailed plans, as well as a realistic budget.

Once the loan is approved, the borrower will receive a draft schedule or draw schedule. Typically, they will only be required to pay interest during construction. The lender does not pay a lump sum, unlike personal loans. Instead, they pay out the money as the work progresses on the new house.

These draws usually occur when important milestones have been reached, such as when the foundation is laid and the framing of a house starts. Borrowers are usually only required to repay interest for funds that have been drawn up to the date of construction.

During the construction of the home, the lender will have an inspector or appraiser inspect the house. The lender may make additional payments to the contractor if the appraisal is approved. These are called draws. To monitor progress, expect to have between four to six inspections.

The type of construction loan may allow the borrower to convert the loan into a traditional mortgage after the home has been built. This is known as a construction-to-permanent loan. A separate mortgage may be needed if the loan is only for construction.

What Is A Construction Loan?

A construction loan can cover the following:

  • The land cost
  • Contractor labor
  • Materials for building
  • Permits

Although home furnishings are generally not covered by a construction loan; permanent fixtures such as appliances and landscaping may be.

What Are The Steps Concerned In A Construction Loan?

#1 Applying To The Loan

The lender will review your credit history and inspect your construction contract. Examining your credit score, income, and employment stability are all part of the process. Lenders usually consider the property’s value increase after construction when assessing your construction contract. Lenders may also consider future rental yield if the property is an investment. Builders are required to submit documentation such as construction license details, approval from the council for the construction plan, and insurance.

#2 Phased Payments

Your lender will make phased payments based on competition milestones once your application has been accepted. Here are the general completion milestones that most lenders follow

Site Prep: This could include demolition, site leveling, and clearing of any old debris.

Foundation: Your builder will take measurements to create construction plans and designs. The foundation of the house, drainage on site, and protection against termites are just a few other steps.

Frame setup: This includes putting in place an internal and external support structure, as well as conduits for electrical and plumbing connections.

Lock up: This allows you to lock up fittings such as doors and windows. This is the stage where all electrical and plumbing work can begin.

Final Stage: This stage is almost complete and includes painting and final inspections to install additional fixtures or appliances.

Each stage will have a payment of 5-20%. The builder will send invoices.

#3 Repayments

Your loan will become a regular loan once construction is complete. You will need to make regular payments. Important note: Your repayments could begin as soon as the lockout stage is completed. You may also need to make ‘Interest-only’ payments during construction, but your repayments after completion will include both principal and interest.

#4 Maintain A High Credit Score.

You should look for a loan to finance construction with great features such as:

  • Account offset
  • Redraw facility
  • Construction time flexibility – 12-24 months
  • Possibility to make larger repayments
  • Increase repayment frequency

The most efficient way to get the most out of construction loans is to seek professional guidance. Lenders pay a mortgage constructions finance broker upon settlement of a loan. Borrowers are therefore entitled to free mortgage broker services. A broker can help you find the best match in the market and will handle all of your paperwork.