Building your own house can be a wonderful experience – but the process and when you pay for the property is different from a regular residential home loan.
After all, you’re asking a bank or a mortgage lender to give you money for something that doesn’t even exist yet.
A standard mortgage loan is not going to cut it – but you may be eligible for a special type of loan known as a construction loan.
Banks and mortgage lenders are often leery of construction loans for many reasons. One major issue is that you need to place a lot of trust in the builder. The bank or lender is lending money for something that is yet to be constructed, with the assumption that it will have a certain value when it is finished.
If things go wrong – for instance, if the builder does a poor job or if property values fall – then it could turn out that the bank has made a bad lending decision and that the property isn’t worth as much as the loan.
Providing that you meet all the below criteria and have good credit, you should be able to qualify for a construction loan. Generally, lenders also require information regarding your income (to be sure you can afford the mortgage payments), living expenses and repayments on any loans, including your current home loan, just as they would with any type of standard mortgage loan.
To try to protect themselves from risk, banks often impose strict qualifying requirements for a construction loan. These usually include the following provisions:
You must use a registered builder who is licensed and insured. Your lender will need to approve your choice of builder. This means that you may have an especially hard time finding an institution to finance your project if you are intending to act as your own general contractor, or if you are involved in an owner/builder situation.
Shortly after settlement you will be contacted by an AFG Home Loans Client Services representative with details about your loan accounts and to confirm your future contact details.
Although it can seem difficult to appraise something that doesn’t exist, the lender must have an appraiser consider the blue book and specs of the house, as well as the value of the land that the home is being built on. These calculations are then compared to other similar houses with similar locations, similar features, and similar size. These other houses are called “comps,” and an appraised value is determined based on the comps.
Typically, 20% is the minimum you need to put down for a construction loan – some lenders require as much as a 25% deposit. This ensures that you are invested in the project and won’t just walk away if things go wrong. This also helps protect the bank or lender in case the house doesn’t turn out to be worth as much as they expected.
These tools make it easy to calculate how much you can borrow based on your income and expenses, estimate your home loan repayments, and work out how to repay your loan faster.
Estimate your home loan repayments and work out how to repay it faster.
Use your details to estimate how much you could borrow.
Need to know more about building a property? Check out our construction FAQ.
A construction loan is a type of loan intended for those building a property rather than purchasing a pre-existing property.
You must use a Registered Builder who is licenced and insured. Your lender will need to approve your choice of builder.
Since you are borrowing for a property that doesn’t currently exist, there is more risk for the lender. As such, lenders typically require more deposit than for a standard home loan. Amounts vary – discuss your individual circumstances with a broker.
With a regular home loan, you typically receive the whole loan amount at settlement. Construction loans are paid out at different stages to align with the progress of the building. As a guide, this would be slabs poured, frame up, brickwork complete, lock up and completion.
A progressive drawdown, or progress payment, is the portion of the loan paid at each stage of construction, as outlined above.
There are several documents and permits required before a construction loan can be approved. This varies from state to state, so it’s best to contact a broker to discuss further.
Depending on the lender, you may have to source the extra funds yourself. It’s important to calculate expenses accurately before you start the project and apply for your construction loan. As soon as you anticipate exceeding approved funds, contact your broker immediately.
We offer our loans exclusively through experienced AFG brokers via our broker network, making sure you receive a loan that meets your individual needs.