Building Loans and How They Work

Homeownership can be a complex subject for not only new home buyers, but even for those who have owned their own home for a number of years. The fact is that every new buyer - and many present owners - will need some type of financing for their home. New home purchases obviously require financing, but so too do improvements on existing homes as well as new homes that buyers want to build from the ground up. Fortunately, financing for any of these endeavors can be obtained through the use of building loans.

Building loans defined

Building loans are especially geared toward the financing of newly constructed homes, as well as home improvements for existing homes. Building loans differ from traditional housing loans in that your payments on the loan do not commence until the bank has issued the final payment for the construction or renovation work that is being accomplished. All that you are responsible for as the work is being done are the interest payments on the loan. At the end of the construction/renovation period, the building loan is converted into a traditional home loan.

How the loan works

With these types of loans, the bank accepts the building or renovation plans provided by your builder, as well as the cost quote. Assessors use those documents to determine the approximate value of the construction or renovation, which is used by the bank to place a loan value on the work as well as the value of the security itself. Once satisfied with the various proposals, the bank makes a decision to grant the loan – at which point the both you and the construction company must lay out all of the project’s details in a clear and concise contract. Throughout the construction process, the lender pays all of the bills as work is completed. This has the advantage of enabling the lender to ensure that enough money is maintained in the building loan account to guarantee that the work is financed through completion.

How do I qualify?

In addition to possessing a good record of credit, there are a number of other qualifications that your project must meet. The builder you choose will have to have been registered in the National Home Builders Registration Council (NHBRC), and the project itself will need to fall under that Council’s purview. This is actually a good thing for you, as the NHBRC provides guarantees to protect your investment from any construction defects that materialize within five years.

Once the loan is made, there are a number of timetables that go into effect. The first is perhaps of the greatest importance to you: the construction has to be completed within a six month period. The loan itself can have varying terms, but payments are generally stretched out over a period of as many as 20 years. Keep in mind that the initial interest rate on your building loan will be a variable one, only settling at a fixed rate once the actual building work has been completed. As with any loan, you should research the requirements thoroughly before making any sort of commitment.