There are normally three ways of buying land and building a new home when using a contract builder.
- You have land and want a loan to build your home.
- If you own your land outright, we can use that as security for a building loan, so you can borrow the funds necessary to build your home. As long as there is enough equity in the land you may not need to contribute any further cash.
- If you already have a loan secured on your land from the land purchase, you will have to use the same lender who has the land loan for your construction loan. If you want to use a different lender for your construction loan, you will have to refinance the land loan to your new lender.
- Buying land now and building in the near future ie 3-6 months away
- If construction will commence within 3 months(varies from lender to lender) of the settlement date of your land you can apply for a loan to cover the purchase of the land and the construction costs( less your cash contribution).
- If the time between settlement of your land purchase and start of construction is more than 3 to 4 months, you can apply for a loan to cover the purchase of the land and also a Pre Approval Loan for your construction. The land would settle as a separate purchase. Once you have your builders fixed price contract, plans and specifications we would contact your lender to action the Pre Approval you have for the construction funds.
- Buy land and start building almost straight away
- In this instance you will simply apply for a loan to cover the land and construction costs(less your contribution). The first “drawdown” of the loan would be the land settlement.
How Does A Construction Loan Work?
Construction loans are paid via a system of Progress Payments. At specified steps of the building process, the builder will be paid for the work they have achieved up to that point.
At the completion of each stage, your builder will complete a progress payment request which you the borrower must sign and then forward to your lender for payment. On receipt of the claim, the Lender will pay the Builder directly for that stage of construction. It is important that you are happy that the work for the stage has been completed properly before you sign the Progress Payment claim.
The schedule of Progress Payments forms part of your building contract, and whilst it may vary slightly it generally conforms to the following formula,
|Stage 1||Base||15%(includes 3% deposit)*|
|Stage 3||Lock Up||35%|
|Stage 4||Fit Out||25%|
|Stage 5||Practical Completion||10%|
* 3% Deposit normally paid to builder prior to lodgement of plans with council.
Please Note: Borrowers are required to contribute any money they have agreed towards the construction before the Lender will start making Progress Payments. The Lender will always retain sufficient funds to complete the building.
Example: You have a contract price from your builder for $220,000. You have agreed to contribute $25,000 and borrow $155,000. The Progress Payment schedule would look like this,
|Stage||Contract Price||%||Payment Due||BorrowersContribution||Lender Progress Payment|
On the first progress payment claim from the Builder for $33,000, the borrower will pay their $25,000 contribution to the builder and the Lender has contributed $8,000. On subsequent claims, the Lender pays the full claim.
NB: If the Borrowers contribution was larger, the Lender will not commence payment of loan funds until a later stage.
Points to Note
- The Lender will normally have a Valuer complete multiple valuation during the construction phase
- Most Lenders charge additional valuation fees for construction loans
- The “On Completion” valuation figure that the Lender works on at the start is generally(but not always) the value of the land plus construction costs, not the estimated end market value.
- For a land and construction package, the first stage may be the settlement of the land.
- For First Home Buyers, the Grant is paid when the slab/foundations are complete.
- Often the final payment is made to the borrower to forward to the builder once they are satisfied that the building is completed to their requirements
Documents Required By Your Lender to Approve a Construction Loan.
In addition to the normal information a Lender needs to approve a loan application, for construction loans they require the following,
- Fixed price Builders Contract signed by both the builder and customer.
- On Completion Valuation( normally done by the Lender)
- Builders Construction Insurance
- Stamped Council Approved Plans.
Key Numbers You Need to Know To Complete Your Building Project
- How much Equity or Cash you have to contribute to the construction costs
- Your borrowing capacity
- Your Construction Cost
As soon as you depart from using a contract builder with a fixed price contract, you will be viewed as an owner builder. This can include
- Deciding to project manage the build yourself, even though you may not be physically working on the construction
- Buying a kit home
- Physically building your home yourself
Whilst funding for owner builders is possible, there are very few lenders who will lend you the necessary money based on the end value of the property. Those that do have stricter requirements around the percentage of the property value they will lend and there is more paperwork and preparation required to get an approval.
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