Construction loans are more prevalent than ever before, and many individuals are opting to build their own homes. Hence, if you want to construct your dream house, now is the greatest time to do it. However, before jumping to conclusions and obtaining a loan, it’s necessary that you thoroughly grasp the credit facility.

What is the concept of a construction loan?

It's a short-term, interim loan for paying for your ultimate dream home's construction. Lenders/credit companies will get a mortgage on the real estate property you're financing, and they'll make regular payments to your builder as the project advances.

How can you get a construction loan?

The following is a list of how construction loans are funded by lenders and credit providers:

-Lenders/credit providers will fund the loan amount needed by you to meet the cost of buying unoccupied land and constructing a structure.

-If you have previously borrowed to buy the vacant land on which you’ll construct your new house, the first loan disbursement made by the lender/credit provider will be used to pay off the unoccupied property.

-Lenders/credit companies will divide the loan into "progress payment drawdown" amounts, which are paid to the builder at the end of each phase of development.

What is the structure of a construction loan?

While a construction loan is similar to a typical mortgage, there are a few important differences:

-It is usually a short-term solution, lasting little more than a year.

-The borrowers will be required to make payments. During the construction phase, simply interest payments are made.

-Only the percentage of the loan amount that has been brought down is used to calculate interest.

-Within 12 months of loan settlement, you must begin construction on your new house.

-The first progress drawdown payment must be made within 12 months of the start of construction on your new house.

What Happens to the Construction Loan When the Building Project Is Completed?

Your loan will convert to a regular Principal and Interest home loan once the construction project is completed.

What Additional Documents Are Required for a Construction Loan to Be Processed?

Plans and Specifications approved by the Council

Fixed Price Building Contract

Together with your financial paperwork, don't forget to give the lender these additional documents. If you’ve all of your information available, the lender will be able to approve your loan application quickly.

The Safest Alternative - Asset-Based Lending

Considering the industry's poor reputation, asset based lending can be an ideal solution for borrowers who take the time to select the right lender with suitable collateral and loan arrangements.