If you are thinking of building your own home, you will need to be familiar with the ins and outs of construction loans. Construction loans are just not as straightforward as simple home loans. There are additional decisions to be made about the structure of the loan, additional documentation is required, and the funding is released in an entirely different way.
In addition to documentation about your finances, income and identity, your application for a construction loan needs to include building contracts for the construction, as well as the plans so that a valuation can be performed.
Further documentation will also be required before the first payment is made from the lender to the builder, including the builders’ insurance certificate and the final plans that have been approved by the local council.
Generally, the land loan and construction loan are split into 2 loans for ease of management. However there are alternative structures where it can be combined into a single loan. There is an option to pay full repayment on land or can have it on interest only payment basis. Whilst construction loan is mostly on interest only payments where the interest will be charged at end of each month.
The drawdown schedule is very important, as you don’t start paying interest on each portion of the loan until it is paid to the builder – you, the lender and the builder need to be satisfied with the schedule.
For the lender to make each payment to the builder, you will need to fill out a drawdown request form from your lender and submit it to your lender along with a copy of the invoice for the specific stage. The lender will organise to conduct an inspection of the completed stage and after the lender is satisfied that the work has been completed and is up to the standard expected in the inspection report, the drawdown can be completed with a payment to the builder.
Any changes to the contract and plans can trigger a reassessment of the loan, so be as sure as you can be that the plans and contracts the lender sees are final, and it is also worth trying to pay for any small amendments from your own pocket, rather than changing the loan and risking a reassessment.
Problems can also arise when other work on the site that is not completed by the builder needs to be paid for, as some lenders only make the remaining funds of the mortgage available after the completion of construction. While some builders will include subcontractors as part of the main contract, meaning that they can be paid by the builder as stages of work are complete throughout the drawdown schedule, others will not do this. Again, this may make it necessary to pay from your own pocket.