How Construction Home Loans Work

construction loans

How Construction Home Loans Work

The decision to build a new home using a construction home loan can be an extremely rewarding one. There are many reasons why people choose to build their own property. One of the most common is that by doing it this way, your home can be built exactly the way you want it to be. By designing the house from scratch or undertaking a major renovation you can be confident that you get the home you want without any compromises. Another reason that many people decide to build their own home, is that if it is done carefully, the property can increase in value significantly.
Just as there are different reasons that people decide to build their own houses, there are different types of construction home loans that can help you pay for it. It is extremely important that you make sure you understand all the details of the construction home loan and what those details will mean to you and your project. If you are in doubt, there is always the option of using a broker who specialises in these areas.

Construction home loans work in a slightly different way to standard home loans. In a standard home loan process, the bank agrees to lend you a set amount of money so you can buy the house you are after and move in. This money is delivered in a one of lump sum payment. Construction home loans work differently in that the lender will agree to a total amount of money that can be lent but will break the payment of that loan down into a series of progressive payment. As the builder you are working with completes each stage he or she will provide the bank with an invoice for the work that has been completed. It is not until all stages of the payments have been made that the total loan is completed. At this point the house is finished and you and your family are able to move in.

While the details of construction home loans can involve lots of different stage and be quite complicated, a good broker will be able to help guide you through the process and make sure your loan is set up in the right way for you.

Many people have the idea that in order to qualify for a construction home loan they have to buy a house and land package in the same place. It is true, that this is often a simpler and easier way to manage the loan but there are many other ways that construction home loans can work. If for example you find a block or piece of land that you like first, it can often be a viable option to establish to loans. The first would be to purchase the land and the second would be the construction home loan that would finance the actual construction of the property.
Another area that many people are often unsure about when considering construction home loans is whether or not it is essential to have a licenced builder to actually construct the home. As a general rule, banks are more confident lending for a project that will be managed by a licenced builder however becoming an owner builder is also a very common and viable option when you are considering construction home loans.

When banks and financial institutions are considering whether to approve a construction home loan, they need to be satisfied that the project is going to finish on time, on budget and that the final value of the property will be equal to or more than the value of the proposed loan. There are many ways to convince a bank of those things including an analysis of the history of the builder. How many projects has this builder completed? Have they been on time and on budget? How many years experience does her have?

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