Construction loans are a type of home loan that some first-time homebuyers may overlook. Construction loans can allow a borrower to build a new home or renovate a home they have already purchased. The application process can be challenging because of the number of people involved. Builders, contractors, borrowers, lenders and many other parties are involved, leading to misunderstandings.
Items to be aware of
Construction is expensive, making it easy to go over the projected budget. If this happens, the borrower can’t apply for another loan. They have to go into their own pocket to pay the extra costs. Therefore, it is crucial to find a lender that will approve them for a loan amount greater than the estimated cost. The great thing about construction loans is they are drawdown loans, meaning the lender pays the contractor the amount they need after each stage of construction is complete. If the project is cheaper than estimated, the borrower doesn’t have to pay back the unused loan amount because it was never “borrowed.”
The documentation you need to provide
To properly assess the cost of the construction project and determine the amount of their loan, lenders require the following application documents:
- A detailed building contract outlining the construction phases, the completion schedule for drawdown payments, the project length and the estimated final cost.
- Building plans and specifications detailing the materials used, the appliances and fixtures that contractors will install and the level of artistry involved. These documents are used to perform a property valuation.
- Quotes for additional work not included in the primary contractor’s building contract. Examples include driveways, swimming pools and landscaping.
Utilising a Mortgage broker during the construction loan application process is vital. Mortgage Street and our brokers can help you find a loan that includes the estimated project cost and additional funds contractors may need to complete the project.