What Can Cause Delays With Your Construction Loan
If you’re building a new home, you may be thinking of using a construction loan to finance your project. A construction loan is more complicated than a standard home loan and there are a number of factors that can cause issues for your project. Getting on top of these will save you valuable time and money and ensure a smoother process.
by Stephen Lemm at Mortgage Choice in Neutral Bay
What is a construction loan?
A construction loan is structured around the building process, with the borrower able to balance when payments need to be made to the builder. These payments are made at key stages of the building process and are known as progress payments.
A construction loan can be very handy when you’re building your new home and save you money in the long run - as interest is only paid on the payments already made, and not on the full amount.
Let’s have a look at some of the issues that can cause a delay to your construction loan:
- Valuation falls short with the lender
A common cause of delays with a construction loan is a shortfall in the valuation from the lender. A low valuation will mean that the particular lender may not lend you what you need, resulting in either you having to put in more money upfront, or find another lender - again causing delays.
For example, let’s say you bought the land for $250,000 and the build cost for your new home is $250,000 for a total of $500,000. But the valuation has come in at only $470,000 - meaning you have to put more money in upfront. Banks are tightening up on their valuations and unfortunately this is becoming a more common problem.
Here are a few ways to have a better chance at a good valuation on your build:
- Include all the essentials: if you have not included landscaping, window treatments, driveway or solar panels, this can bring the value of the property down.
- Check the valuation report: they can make mistakes and miss essential items that could bring the valuation up the amount you need. Check things like comparison properties (did they compare the right number of bedrooms or land size?), or if they have included the quotes you got for the new driveway.
- Get a second (or third) opinion: we often find that a difference of opinion between the valuators could be the difference you need to get your finance in place.
A good mortgage broker will be able to talk you through this, and strategise with you on the best chance at a good valuation. They will also be able to handle things if your valuation comes in too low.
- Variations to the building contract
Not many people know this, but changing the plans or building contract during construction can require your lender to re-approve your loan. Any changes to the contract or plans can mean unforeseen costs, so you should avoid changes unless you can pay for it with your own money.
You can minimise your risk of expensive variations through careful planning and due diligence. Consider getting approval for a slightly higher loan amount. It is worth setting aside contingency savings that you can use to cover small unexpected costs and avoid the hassle of changing the building contract.
Of course, plans can change during a project, at a cost and it’s important to let your lender know as soon as possible.
- Progress payments not paid on time
Once a construction loan has been approved and your home is being built, lenders usually pay the builder directly through progress payments throughout the stages of construction.
Typically, you will receive an invoice from a builder. You then complete a drawdown request form and send this, along with the invoice, to your lender. The lender may need to carry out a valuation to verify the completed work before releasing payment to your builder within five working days.
Delays occur when a step or documentation is missed or completed late, so it is important that you stay on top of this. Again, a good mortgage broker will handle the progress payments on your behalf to make sure that the finance part of your build goes smoothly.
- Not getting your paperwork in order
A lot of paperwork is involved when organising a major building project and getting your construction loan approved. Delays are caused when you don’t provide all the necessary documents the lenders need.
You will need to provide the usual loan qualification requirements such as proof income and bank statements. In addition, you need the following:
- Building contract with a licensed builder that has details of the project’s specifications, any possible variations, allowances and all costs.
- Council-approved building plans.
- Evidence you are using a registered builder, such as a copy of your builder’s license.
- Builder’s insurance policy.
- Quotes for any additional work not covered by the main building contract.
It’s best to provide your lender with everything in one go to avoid going to-and-fro as things can get lost in the process.
Why you should use a (good) mortgage broker for your construction loan
As you can see, a construction loan can be quite complex, and it’s likely you are going to have more than enough on your plate with planning your dream home. A mortgage broker is no cost to you, and can help you choose the right construction loan to match your budget and your new buy - with careful consideration on choosing the right lender.
It also means that they will handle all the paperwork and legwork - by that we mean, the hours of following up the lender - and be able to handle any issues for you should they arise.
Mortgage Choice in Neutral Bay are here to help
Our team in Neutral Bay is here to help you find the right construction loan and make the process as stress-free as possible for you. Call Stephen Lemm from Mortgage Choice in Neutral Bay on 0414 242 924 or visit their website.
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