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Construction Loans, What You Need to Know

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Are you thinking of building your own home? Before you do, make sure you are familiar with construction loan structure. 

Remember, construction loans are quite different from simple home loans for established properties. Additional decisions may affect the structure of the loan, extra documentation may be required. Also, you will receive the funding differently compared to traditional home loans for established properties. 

Allow us to explain this further. 

What Other Documentations Are Needed? 

Apart from your personal identification, income and finances, a construction loan application will require you to submit tenders or contracts for the land and construction. You need to prepare the plans so a thorough valuation can be performed immediately.  

Do not be surprised if further documentation is needed before the first payment is made from the lender to the builder. A schedule of payment or drawdowns, builders’ insurance details and final plans that the local council has approved will be required. 

What Structure to Use? 

The initial loan will be a split of your mortgage into a land loan and a construction loan. This is because land will be owned by one party and construction will be completed by another party (Building company. occasionally you will have the builder own the land and they will build your home on the land owned by the building company.

Ideally, you pay the lender’s mortgage insurance (LMI) and start being charged interest and making repayments on the balance of the land loan only. The interest and repayments for the construction will begin once each drawdown is processed.  

How Do You Get Funding?

The drawdown schedule is critical because you don’t start paying interest on each loan portion until the fund is already paid to the builder. Ensure that you, the lender, and the builder are satisfied with the schedule. 

Before a lender makes payment to the builder, you will have to accomplish a drawdown request form from the lender. This will be submitted to your builder, and your builder will then send the form to the Finance Broker or the lender with an invoice stating the part of the payment. Once the lender is satisfied with the work completed, the payment will be made. 

Take note of any changes in your contract or plans as this can result in a reassessment of the loan. We encourage finalising the contracts and plans before you submit them to your lender. If there are small amendments in the future, it’s best to pay it from your pocket instead of undergoing reassessment for the loan adjustment.

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