Building your own home can be a wonderful experience, however the process can be long and expensive. Obtaining finance for something that doesn’t exist can also prove to be tricky. As a result, a standard mortgage isn’t offered by the bank, but you may be eligible for a special type of loan known as a construction loan.
The banks are cautious of construction loans for a variety or reasons. One of the key risk factors is the trust and reputation of the builder. The banks are financing something that doesn’t exist yet with the assumption that once completed, it will have a certain value when it is finished.
The banks want to avoid a position where the builder does a poor job or if the property value falls, the bank will be exposed with a loan that is more than the worth value of the property.
As a result of the above, the banks aims to prevent these occurrences by enforcing a strict credit guidelines on the requirements for a construction loan:
A qualified builder must be involved – a qualified builder is a licenced contractor with an established reputation for building homes. This is in contrast to if you choose to act as the qualified builder for you own project, in these cases the banks view this as an owner/builder situation and usually limit the borrowing to only 60% of your project value.
Lender needs detailed specifications, plans – Building specifications detail what materials, finishes, will be present in the completed home. Building plans document what the property will look like and include information such as ceiling height, room dimensions etc.
The construction project must be valued through an independent valuation. – The lender must have the construction project valued based on the building specifications and plans and the land it is to be built on. This is then compared to other properties in the area to reach an appraised value.