What is construction finance?
Construction finance is defined as “the method of financing used when a borrower contracts to have a house built, as opposed to purchasing a completed property.”
Construction can be financed in two ways. You either take out two loans, a construction loan for the period of building and then a permanent loan from another lender to pay off the construction loan when the building phase is complete. Or you can use a single loan from one company which is a construction loan during the building phase and becomes a permanent loan after the building phase completes.
Is it cheaper to build or buy a house?
What more could you want from a home than one which has been built to your specification and has everything you desire in a home? People are often put off by the cost of such a project and the stress involved, but wouldn’t it be a wonderful dream if it were cheaper to build than to buy? That may just be the case nowadays with the price of housing rising ever more steadily.
The costs to consider when building a home include;
- The shell of the house, including walls, windows, doors and the roof
- Interior finishes, such as cabinets, flooring and countertops
- Mechanicals, i.e. the plumbing and heating, then the electrical installation
- Kitchens and bathrooms
- Architect and engineers drawings
- The plot of land you are going to build on
- Excavation and foundation work
- Building permits and planning approval
- Any required land inspections and adjoining fees for local governments
These costs can easily be covered by a construction loan, which is released in stages as each part of the build is completed.
Can I use the value of my land as a downpayment on a construction loan?
If you happen to own the land you want to build on already, then you need to prepare your ideas and plans for the land before you seek finance. Talk to a reputable architect and have them draw up your ideas for the land and prepare a personal financial statement amongst other requirements for the application process.
Before meeting with a lender you will need to make sure there are no obstructions in place such as liens in effect on the property. Search through your local towns registry for any old liens which may be attached and if any are present have your lawyer take steps to correct the record.
As long as you meet the lender’s criteria and have got yourself a reputable builder and architect, you should be able to secure finance which will be released to the builder in stages as various aspects of the build are completed. The lender will also come to inspect the property regularly while construction is in process.
How long does it take to get approved for a construction loan?
You can expect a construction loan application to last a few weeks longer than your standard mortgage application of 7 to 10 days. This is because all the plans and specifications, as well as the contracts need to be reviewed before approval. But securing pre-approval can accelerate proceedings.
Is it harder to get a construction loan or a mortgage?
Traditionally, construction loans are short term and have a lifespan of a year or less. They also release funds gradually as periods of construction come to a close. The lenders keep a close eye on things and inspect the sites regularly for progress updates.
This type of finance comes with its down sides as it does cost a lot more to secure a construction loan, with higher deposit amounts. It is, however, easier to secure these loans if you do have the required deposit. Especially if the self builder owns the land on which they intend to build.
Can you get finance for just the materials for construction?
There are finance options available for all kinds of construction materials ranging from;
- Steel framing systems
- Structural steels
- Mass concrete
- Composites
- Thermal protection and insulation
- Carpentry items – staircases, windows etc.
- Structural timber
- HVAC (Heating, ventilation and air conditioning)
- Electrical systems and equipment
- Flooring
- Surface finishing
- Bricks and blocks
- SIPs panels
- Roofing materials
You should be able to find unsecured loans and secured loans to fund the short term acquisition of materials for a building.
Those small financing options can be paid using the staged amounts of money you receive after each stage of the build comes to a completion. Meaning they are extremely short term financial options you should only consider in an emergency stage of finance during a build.
When you reach approximately 45 days before construction is due to end you should contact the mortgage lender to start the process of conversion from a construction loan to a full mortgage. With the lender, you will make a new application for credit and ensure there are no financial transactions which may impede the process from moving forward, and order a final appraisal and survey.
Can a first time buyer get a construction loan?
If you are a first-time buyer and have a good credit history, along with some savings to help you pay down payments of anywhere from 10 to 20% of the total amount borrowed, you can easily secure finance for a construction project.
There is a lot of decision making which goes into taking on a construction project of your own. Choosing the right floor plan, the location, the builder and your favourite designs when it comes to your own personalised interior. Without the right type of finance, those decisions are left up to someone else and you may not end up with the home of your dreams.
The 6 benefits
After taking into account all of this information about the prospect of taking finance for a self-build project, the main positive benefits you can take from this are the following;
- Cheaper than buying a house and you are able to build the house of your dreams
- You can use the value in your land to secure extra finance
- It is a straightforward and reasonably quick approval method, especially with pre-approval secured
- It is easier to secure a construction loan than a traditional mortgage
- You can self-build and secure finance for just the material costs of a self build
- First-time buyers can secure finance to self-build
