Building Your Dreams: Understanding Construction Loans
Building a house from scratch or planning home renovations can be a fun and rewarding experience, but it can also be a long and expensive one.
Navigating the world of construction finance can be daunting, especially for those who are new to the process. At ARG Finance, we can help you with the financial side of things by advising you on your options, which may include applying for commercial construction loans. Our experts can provide guidance and support, keeping you informed and updated from beginning to end, making the process easier and less stressful.
Getting Started with Commercial Construction Financing
Before embarking on your construction or renovation project, it’s essential to understand the unique nature of construction loans. Unlike regular home loans, construction loans are designed to finance the building process itself, rather than the purchase of an existing property. This means that the loan is disbursed in stages, with funds released as each phase of construction is completed and inspected.
When & Wwhy Consult a Construction Loan Broker?
Given the complexity of construction finance, it’s highly recommended to consult with a experienced construction loan broker before proceeding with your project. A knowledgeable broker can provide valuable advice and explain the intricacies of commercial construction loans, helping you understand how they can benefit your specific situation.
At ARG Finance, our construction loan brokers have extensive experience working with a wide range of construction loan lenders. We can help you navigate the loan application process, ensure that you meet all the necessary qualifications, and assist you in securing the best possible terms for your construction loan.
Construction Loan Facts
LOAN DETERMINANTS
When comparing construction loans, it’s important to have a solid understanding of the factors that determine the value and terms of the loan. These determinants can vary between lenders and can significantly impact the overall cost and feasibility of your project.
Fees Payable on the Repayment of Your Construction Loan
One of the key factors to consider when evaluating commercial construction financing options is the fees associated with the loan. Lenders may charge various fees throughout the life of the loan, particularly if they require assistance from solicitors or settlement agents to restructure the loan, consent to dealings affecting the security property, or in the event of a loan default. Some common fees to be aware of include:
- Lender’s Administration Fee: You pay this fee at every point of discharge of mortgage.
- Construction Drawdown Fee: This fee, usually an approximate amount of $300, is paid by the borrower prior to the first progress drawdown payment on all construction loans.
- Loan Processing Fee: You need to pay this fee for processing and settling a new loan.
- Annual Fee: You need to pay this fee, approximately $120, annually on initial drawdown according to your loan terms.
INTEREST RATES
Interest rates play a significant role in determining the size of your repayments, as construction loans are typically paid off only during the construction period. It’s crucial to carefully compare interest rates between different construction loan lenders to ensure that you’re getting the most competitive rate possible.
Keep in mind that interest rates for commercial construction financing may be higher than those for traditional home loans, as the lender is taking on additional risk by financing a project that has not yet been completed. However, by working with an experienced construction loan broker, you can often secure more favourable rates than you would be able to on your own.
FEES
Some construction loans include extra fees that need to be paid for at every stage of the construction loan till after the completion of each stage of the building. Below are some of the fees that you need to know about.
- Construction Administration Fee: You need to pay this fee to the builder, whenever a satisfactory bank or credit union account for electronic payment transfer is not made available. This fee rounds up to approximately $13.
- Electronic/ Telegraphic Transfer Fee: Every time that you request the lender to complete an outward electronic transfer, after the settlement of the construction loan, an approximate amount of $50 needs to be paid.
- Production Fee: A production fee of approximately $99 is payable as and when there is a request to produce a title at the Land Titles Office or consent to any lodgement.
- Restructure Administration Fee: A fee of about $100 is payable by the borrower, each time a request is made to the lender to restructure the facility.
- Consent Processing Fee: You are required to pay this fee if you make any request to the lender to consent to matters that may include 2nd mortgage, Deceased Estate, Lease, Easement or Transfer of Ownership or a loan variation. This fee rounds up to about $100.
Qualifying Requirements for Construction Finance
To qualify for a construction loan, there are several key requirements that must be met. These can vary between lenders but generally include:
INVOLVEMENT OF A QUALIFIED BUILDER:
Most financing institutions require the involvement of a qualified builder or licensed general contractor in the construction or renovation of your home. Finding a lender that allows you to act as your own general contractor can be challenging.
DETAILED RENOVATION SPECIFICATIONS:
You will need to provide detailed floor plans and a comprehensive list of the materials that will be used in the renovation. This checklist, often referred to as the “blue book,” is typically assembled by the builder.
ESTIMATE OF HOME VALUE BY APPRAISER:
As the property being financed does not yet exist, the lender will need to have an appraiser evaluate the blue book and specs of the house, as well as determine the value of the land on which the home is being built.
LOAN DOCUMENTS CHECKLIST
When applying for a construction loan, there are several documents that you will need to provide to the lender. These can include:
PERSONAL IDENTIFICATION
- Current Passport or Birth Certificate (70 points)
- Driver’s License (40 points)
- Marriage Certificate (if applicable)
- Other forms of identification to reach a total of 100 points
INCOME DETAILS IF SALARIED:
- Two most recent payslips from your employer mentioning the name of the company, payslip number and the year-to-date income figure
- The most recent group certificate from current employer
IF SELF EMPLOYED:
- Last two year’s personal and business tax returns
- ATO assessments
- Additional income details
Other Documentation:
- Photocopy of a credible builder’s fixed price tender, including all specifications
- Photocopy of council-approved plans
- Rent income statements
- Proof of share dividends or interest earned
- Centrelink letter confirming family tax benefits
- Centrelink letter confirming permanent government pensions
- Private pension group certificate or statement
- Proof of any other regular ongoing income
Your construction loan broker can help you gather and organize these documents, ensuring that your application is complete and accurate before submitting it to potential lenders.
Navigating the World of Commercial Construction Financing
Securing construction finance for your building or renovation project can be a complex and time-consuming process, but with the right guidance and support, it doesn’t have to be overwhelming. By working with an experienced construction loan broker like those at ARG Finance, you can benefit from their extensive knowledge of the construction loan landscape and their relationships with a wide range of construction loan lenders.
Our team will work closely with you to understand your unique needs and goals, helping you navigate the loan application process from start to finish. We’ll provide expert advice on the various commercial construction financing options available, assist you in gathering and preparing the necessary documentation, and negotiate with lenders on your behalf to secure the most favourable terms possible.
Whether you’re building your dream home from the ground up or undertaking a major renovation project, ARG Finance is here to help you turn your vision into a reality. Contact us today to learn more about how we can assist you in securing the construction finance you need to bring your project to life.
Explaining the Loan Process
1 STEP ONE
Find offers for construction loans:
It’s important to research and compare construction loan offers from varied sources before making a final decision, as the construction loan interest rate can differ greatly from regular home loans.
2 STEP TWO
Ensure you have a clean credit history:
Prior to applying for a construction loan, make sure your credit history is clear. Also, get yourself into a good financial position. The first step for approval of a loan is evidence of savings. If you own a block of land that you intend to build a home on, then this is a great first step. This will act as your deposit on the property.
3 STEP THREE
Prepare your documentation according to construction stages:
Construction loans for builders are taken forward in stages. For this reason, you will not receive all of the funds in one lump sum. The five common stages that are involved include:
- Foundation/Slab
- Frame and Brickwork
- Lock Up
- Fixing (plastering, etc)
- Completion
You need to present a professional evaluation and estimation of the construction plan before handing them over to the lender for home loan approval. The lender gets a complete pre-assessment of the assumed value once the house is completed. After this, arrangements are made to convert owner builder construction loans to a regular home loan.
4 STEP FOUR
Construction plan evaluation:
The lender will scrutinise your construction plans and may conduct an appraisal or inspection to determine the project’s value and feasibility.
5 STEP FIVE
Distribution of funds to the builder with completion of each key stage:
Funds are given to the builder upon completion of stages of construction and an assessment of the construction site to ensure that the work is proceeding according to the plan. The progress payments are appropriately matched to the stage of home construction.
You should always remember that the loan amount will only be forwarded at a stage upon completion when a valuer or surveyor has confirmed that the work has been done satisfactorily.
6 STEP SIX
Approval from council:
Prior to approval of the final payment of your construction loan, you must present an occupancy certificate, issued by your local council. Until you have taken this step, lenders will not advance your funds.
The occupancy certificate ascertains that your property is fit to be a residential property and assures the lender that they can go ahead with the process of switching your construction loan to a standard home loan.
7 STEP SEVEN
Insurance and safety:
Last but not least, do not forget to take out a builder’s risk insurance policy to safeguard your lender and yourself against any unforeseen damages, especially if the work has been contracted out to a builder with commercial liability insurance.
8 STEP EIGHT
All set and ready to go. You can now get the interiors done. Have fun!
Frequently Asked Questions
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Construction loans are designed to finance the building process itself, with funds disbursed in stages as each phase of construction is completed and inspected. In contrast, regular home loans are used to purchase an existing property. Construction loans often have higher interest rates and require a larger down payment compared to traditional home loans, as the lender is taking on additional risk by financing a project that has not yet been completed.
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A construction loan broker can provide valuable guidance and support throughout the loan application process. They have extensive knowledge of the construction finance landscape and relationships with a wide range of construction loan lenders. A broker can help you understand your options, assist in gathering and preparing the necessary documentation, and negotiate with lenders on your behalf to secure the most favourable terms possible for your commercial construction loan.
Call or Email Us Today
Make ARG Finance your first choice when you need advice and guidance on new build construction loans. Visit our contact page for more details about how to get in touch with us.
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