A new home construction loan is a financing arrangement that can enable you put up a home in less than a year with money obtained from a financial institution such as a bank. It’s reflective of the time required to put up the home, and the period usually ranges from 6- 12 months. Once your construction loan is secured, the builder will get paid by your lender after completion of each work stage. Loan repayment officially starts once construction comes to an end.
As a prospective home owner, you can choose to combine the construction loan with your standard mortgage plan in an arrangement popularly known as construction to permanent package. Consequently, you won’t necessarily have to refinance when construction ends and endure two separate closings.
How does a new home construction loan work?
Typically, the builder calculates the amount of money required to construct your home and segments projected costs into work stages.
Your builder will get compensated by the financier after each work interval once they’ve independently established completion of the designated work.
What you get upon applying for a new home construction loan
1.100% of construction costs if you already own the land.
2. Interest is paid on drawn amount only.
3. Up to eighty percent for buying and building with payback period of up to twenty years.
4. 9-month or 12-month moratorium during the process of construction. Repayment starts immediately thereafter.
5. Disbursement in four phases, twenty five percent of the amounts at a time. This is subject to regular reports by relationship manager and architect’s certificate.
6. Stage valuations are carried out throughout the home construction process.
7. Building plans must be duly approved.
8. Valuation fees for pre-construction and post-construction apply.
9. Bill of Quantities must be prepared by an independent and credible Quantity Surveyor.
10. Site must be located in an urban area and intended for strict residential use.
11. Fixed price contract for large amounts.
When do you start paying?
You’ll be required to pay interest on money drawn out every month. You’ll start repaying the lender for bulk costs upon completion of the construction project.
If it’s financed by the builder, the construction loan becomes the responsibility of the builder. As a result, you won’t have to make any payments until the construction comes to an end.
What are the steps involved in securing a construction loan?
1. Find a good agent
If you work with an agent who’s not associated with the builder in any way, it gives you extra security and expert eyes that will help you avoid problems thereafter.
2. Check your credit score
It’s very important to critically examine your credit score. Get checked by credible credit bureaus and obtain your FICO score from one or two of the credit bureaus.
3. Prepare financial documents
Ensure that you have detailed documentation of all your financial transactions, including monthly or annual income, 401k finances, liabilities and assets.
4. Obtain pre-approval
When you have all documents ready, it’s time to establish how much the financier can give you by getting pre-approval. Remember that you’ll require financing for construction costs and mortgage as well. Roll them together in a construction to permanent package.
5. Find the right builder
Consult friends, family, neighbours and colleagues and ask them to recommend a list of good builders. You can also conduct online research by reading reviews.
Find the most suitable builder who has already built a reputation of completing construction projects within budget, according to specification and on time.
When you find the right builder, follow the steps outlined below:
6. Purchase land (if you had not bought a piece of land yet)
7. Ask the builder to prepare a comprehensive construction plan. It should contain all the relevant dates and required signatures.
8. Apply for a new home construction loan
9. Submit your application for a mortgage
10. Start paying interest