Building a house has long been known as a fixed asset. If you have free land and don't have the necessary capital, consider investing in it. The most important question remains. Do you have the funds to buy the materials and pay the fees? This is the perfect time to start thinking about applying for a home loan.

Construction loans are short-term financing provided to borrowers to cover all the costs involved in building a home from start to finish. It includes all permits, preparation of plans, purchases of land, labor and materials.

This is how construction loans work

Construction loans are available for completed homes. Because of this, the approval and application process is more complex than traditional mortgages. You must provide the lender with an estimated timeline and budget for review. Your financial situation can also have a huge impact on this type of credit access.

Once you've approved the loan, the lender will deposit the funds in instalments as you complete the various stages of the building. Checks are performed before each payment.

You may need to repay interest when you withdraw your funds, not the entire loan. You also have the option to convert your building to a mortgage upon completion. If the lender does not agree, you can apply for construction financing to repay the construction loan or terminate the loan agreement.

Types of Home Loans

Whether you're building a home from scratch or remodeling, there's a loan for you.

 

Housing Loans

This type of loan is a better option for aspiring home builders. This is a one-time loan that finances the construction, which is then converted into a permanent mortgage. The borrower pays interest during construction. It can be more expensive than a traditional mortgage.

Renovation loan

Home improvement loans offer borrowers the opportunity to buy and renovate a home while paying two monthly payments.

Builder Loans

Most people hire a general contractor to ensure that all operations are well coordinated during construction. However, some builders offer jobs as contractors, and some banks offer builder funding for the job. They require owners to demonstrate expertise during construction, training and permitting.

Terminate the loan

A final loan will be made available after construction is completed. This traditional mortgage allows buyers to apply for a loan after completing their new home. This mortgage application is the same as any other home. The simpler the better.

Home loan only

This is a short-term loan, usually for one year. Only the construction period is included. It is considered a high-risk loan due to variables such as local community approval and builder cooperation.

This loan is a bit time consuming to process and difficult to qualify for. It has higher interest rates than standard loans with high fees.

How to Get a Construction Loan

You will not get a construction loan without approval. Getting this type of loan is more complicated because it is not secured or guaranteed by the home.

• Good creditworthiness of the borrower is necessary to minimise risk

• Your monthly income has a low debt-to-income ratio.

• At least 20% mortgage deposit.

• Bank approves product and construction budget.

• Have enough money to pay the construction loan.