Have you secured a block of land in the suburb you love and are now looking to construct your dream home? Then you’ll need to consider a Construction Loan to help you achieve this. We at the The Finance Professionals are experts at Construction Loans and we can help you source the finance to complete your home with as little hassle as possible.
What are Construction Loans?
Construction Loans are a specialised lending option that allow you to finance the construction of your property. They operate differently to a standard home loan in that money is progressively lent as work on the construction reaches specific stages. These stages are generally standard and form part of the fixed price building contract that you enters into with your builder.
There are typically 6 stages, or progress draws, to a building contract. These are:
- 1. Deposit
- 2. Base - foundations of the property completed
- 3. Frame - frame has been completed
- 4. Lock Up - external wall and roofing completed
- 5. Fixing - internal fittings and fixtures completed
- 6. Completion - all contracted items completed
To mitigate the risk to the lender, the lender will advance these progress draws directly to the builder. This ensures that the builder is being paid for their work and that the building contract is being maintained. The lender will also send out a valuer to check that the work is being completed before releasing any progress draw to the builder, ensuring that the work being paid for has actually being performed.
During the construction period the actual amount being lent is constantly changing as each progress draw is advanced. At any point in time during the construction however, you will only pay interest on the amount you have physically drawn down, not the the approved loan limit. Repayments are also interest only during the construction period which helps during this often stressful time.
We at The Finance Professionals understand that not all borrowers qualify for standard bank home loan products. As such we are proud to offer Construction Loans for people who may the following issues that preclude them from standard bank finance:
- Low Doc Construction
- Bad Credit Construction
How does a Construction Loan lender work?
Construction Loans are one of the most challenging loan types for a lender. They can be quite complicated, involve numerous parties and require significant documentation. In our experience the most important things a lender considers when assessing a Construction Loan is:
- 1. Does the building have the necessary permits?
- 2. Does the builder hold the necessary qualifications, and are the building costs within market expectations?
- 3. Does the borrower have enough funds to complete the construction?
They mitigate the first two of these by requiring the following documents be provided:
- Council endorsed plans and permits
- Signed Building Contract along with building specifications
- Evidence of Builders Insurance, including Public Liability
These documents will be assessed by the lender, in conjunction with their valuer or quantitative surveyor, to ensure all is in order. This enables them to be sure that the physical building complies with all necessary legal and regulatory requirements and also that the builder has sufficient insurances and will be undertaking the work at a realistic price.
With regards to whether you have enough funds to complete the construction, it is standard lender policy to fund the complete Building Contract. They do not want you to have to fund any portion of it during the construction as it is their ultimate aim to complete the construction. As such they will always want you to contribute your equity prior to construction. An example of how this operates is below. This example assumes a current Land Valuation of $200,000.00, Construction Cost of $250,000.00 and a final LVR of 80%.
Equity Contribution Example
|80% of End Valuation:||$360,000.00|
|Less: Construction Costs:||$250,000.00|
|Less: Initial Loan:||$110,000.00|
As you can see in this example, the lender would require you to have $90,000.00 in equity in the property prior to the construction commencing.
Once all these points have been satisfied, the lender will then apply their standard credit assessment to ensure your suitability to borrow the final loan amount.
Why Choose The Finance Professionals for Construction Loans?
Put simply, we have an unrivalled expertise in Construction Loans. We have financed all types of construction in the past so we have a deep understanding on how to structure a Construction Loan application. We understand the building process thoroughly and this allows us to advise you on the process and what to expect. We will also engage with all the various parties involved to assist you getting all the required documents ensuring your application is processed as smoothly as possible. Once your application has been approved we are still on hand to assist you in the progress claims process. You won’t be forgotten and we will work with you throughout the construction to ensure everything flows seamlessly.
Our ability to place Construction Loans for those who may have Bad Credit or who are Low Doc allows us to help pretty much everyone who is seeking finance to construct their home. We do not turn away clients who have these issues and we try and find solutions for everyone. We have a genuine desire to see everyone own their own home and we are proud to offer solutions that many do not provide.
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