How to get a construction home loan
Some tips on getting a construction loan for your next luxury home build
Construction loans for new-built homes are either obtained by the homebuilder or prospective owner. In the past, small builders had greater access to capital but now must frequently put the onus on the buyer to get the loan. That’s one reason many new homes rising today are simply “specs” built by the builder.
The basics of construction loans
Let’s proceed on the assumption that you’re taking out an individual construction loan. Such loans, which can be tough to get without a previous banking history because of the lack of collateral (a finished home), have special guidelines and include monitoring to ensure timely completion so your repayment can begin promptly.
Construction loans are typically short term with a maximum of one - two years and have variable rates that move up and down with the RBA rate. The rates on this type of loan are higher than rates on permanent mortgage loans. To gain approval, the lender will need to see a construction timetable, detailed plans and a realistic budget, sometimes called the “story” behind the loan.
Once approved, the borrower will be put on a progressive drawn home loan, that follows the project’s construction stages and will typically be expected to make only interest payments during construction. As funds are requested, the lender will usually send someone to check on the job’s progress.
Why is there so little information on construction home loans
Why is there so little information or competing lender offers on construction loans online? For starters, these loans represent only a very small percentage of home loans. Plus, they’re a bigger risk. Hence, such financing isn’t the type of thing lenders aggressively market online; you have to hit the streets for it. Regional banks and credit unions are typically the best sources.