Construction loans are a specialised type of loan that are specifically designed to finance the construction of a new home or a major (structural) renovation. They differ from standard home loans in several keyways and require borrowers to navigate a more complex process.
One of the main differences between construction loans and standard home loans is the disbursement of funds. With a traditional home loan, the entire amount is typically disbursed at the time of closing. However, with a construction loan, the funds are released in stages as the construction progresses. This is known as a “draw schedule” and is a crucial component of the loan agreement.
The draw schedule is typically determined by an appraiser or an inspector who evaluates the progress of the construction at various stages. Once a specific milestone is reached, such as the completion of the foundation or the framing of the house, a certain portion of the loan amount is dispersed to the borrower (via payment of the builder’s invoice). This ensures that the funds are being used for their intended purpose and reduces the risk for the lender.
Another important aspect of construction loans is that they usually have a shorter term compared to traditional home loans. While a standard home loan may have a term of 30 years, a construction loan typically has a shorter term of 28-29 years with a mandatory 12 to 24 months interest only period during the construction. This is because the construction process is expected to be completed within a specific timeframe. There are a few lenders that will provide funds just for the construction period of 12-24 months and once the construction is finished, the borrower can then choose to either refinance the construction loan into a long-term mortgage or pay off the loan in full.
In addition to the unique disbursement structure and shorter term, construction loans also require more documentation compared to standard home loans. Lenders often require detailed plans and specifications of the construction project, as well as a realistic budget and a timeline for completion. These additional requirements are necessary to ensure that the project is feasible, and that the borrower has a clear understanding of the costs and risks involved.
When considering a construction loan, it is vital to carefully evaluate your financial situation and thoroughly research the different loan options available to you. It is wise to seek help from a mortgage broker who can provide valuable knowledge and guidance on the complexities of this process.
In conclusion
Construction loans offer a unique financing solution for individuals who are interested in building their own homes or undertaking major renovations. These loans provide flexibility in terms of funding, allowing borrowers to access the necessary funds at each stage of the construction process. However, it is important to be aware that they come with additional requirements and complexities that borrowers need to navigate. Thankfully, with the help of experienced professionals, securing financing for your dream home can be made easier. If you are considering building your dream home and would like expert guidance from start to finish, please don’t hesitate to contact 180 Finance at 0480 311 301 or book a video call. Our services are provided to you at no cost whatsoever.