When & why consult a mortgage broker?
Construction loans are different from the regular home loans. So, before you go ahead with the construction or renovation of your new home you should talk to a mortgage broker who can lead you through the process.
A mortgage broker will be able to give you valuable advice and explain extensively, what a construction loan is and how it can benefit you.
Involvement of a Qualified Builder:
It is essential to involve a qualified builder/ licensed general contractor in building or renovating your home because financing institutions that will allow you to act as your own general contractor are hard to find.
Detailed Renovation Specifications:
This consists of floor plans and details of materials that are going to be used in renovating the home. It is a comprehensive checklist wherein every detail is assembled by builders known as the blue book.
Estimate of Home Value by Appraiser:
In construction loans, it is almost next to impossible to appraise something that is non-existent. So, a lender must have an appraiser to consider the blue book and specs of the house. The appraiser must also be asked to determine the value of the land where the home is being built on.
Large Down Payment.
You need to put down a minimum amount of 20% as down payment for a construction loan, but some lenders require as much as 25%. The payment ensures your investment in the project and that you won’t just walk away if things go wrong. The payment also acts as a protection for the bank or the lender in case the cost of construction for the house does not turn out to be worth as much as was expected.
Loan Documents Checklist
Your personal identification should amount to 100 points. A current Passport or Birth Certificate equals 70 points, and a driver’s licence contributes up to 40 points. If you are married and a copy of your Marriage Certificate would also be required. You can ask your mortgage broker for other identifications to sum up to 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; and
- The most recent group certificate from current employer.
If self employed:
- Last two year’s personal and business tax returns
Additional income details
Loan Documents Checklist
- Photocopy of a credible builder’s fixed price tender consisting of all specifications
- Photocopy of plans approved by Council
- Rent income statements
- Proof of share dividends or interest earned
- Centrelink letter, which confirms family tax benefits
- Centrelink letter, which confirms permanent government pensions
- Private pension group certificate, or a statement
- Proof of any other regular, ongoing income
Frequently Asked Questions
Most banks and lenders will allow you to borrow up to 95% of the value of the land including the construction costs.
Some states in Australia allow people to include a finance clause when signing the contract for their vacant block of land. This clause is most frequent in cases when someone purchases a vacant land or an established home through a private treaty sale. Here, the clause “Subject to Finance” can be used.
The main reason for adding specific information like this clause is, to protect an investor against having to accept finance that isn’t right for him/her or their situation. So, if you happen to receive a pre-approval from your lender and they already know their interest rate, then this information too can be entered into the clause.
Construction Completion Period
Most construction loans in Australia allow a period of two years for completion of construction of a new home. If the land purchased is a part of the construction loan, then the time starts after a land purchase has been settled. When construction is complete, we will arrange a final inspection for the property.
Progress Draw Payment
A progress draw payment or draw down is an individual payment that the bank pays an investor’s builder for a respective stage of work that is
completed. Mostly, you might be allowed to make some extra payments from the mortgage, even though the construction loan is in the stage of “progress draw.”
Builder’s insurance covers the builder from going broke. However, if a builder happens to get broke prior to the completion of construction of your home then another builder can be appointed to complete the renovations of the home. The loan company will then compensate for any cost difference that may come up.
If you are an owner-builder then be wary that some institutions place tighter restrictions on this type of lending. These restrictions might consist of a reduction, in the amount available for borrowing, as opposed to people who use a separate licensed general contractor under a fixed price contract. Restrictions which are strained or do not have the ability to borrow, are in place due to the owner-builder loans being classed as a high risk category.