Constructing your home from scratch is a one-of-a-kind experience. Construction mortgage makes it easier for borrowers to tailor and design their homes based on their lifestyle preferences, budget, and needs. The mortgage only simplifies building the property but requires informed decision-making and careful planning. There are certain things to take care of before signing for the mortgage. You can learn about construction mortgages in detail here.
1. Cost of construction mortgage
The interest rates for a Construction loan are higher than regular mortgages. But the good part is that you can find a fair and cost-effective deal if you have a good credit history and credit score. Plus, the loan amount and the type of construction loan you choose also impact the interest rate.
The interest rates fluctuate according to the market demand and situation. Hence, it is advised to do some research to find your ideal mortgage offer.
2. Costs covered by the construction loan
Learn about the costs that will be covered under the mortgage. Generally, a construction loan is used to cover the costs and expenses associated with the construction of the new building. And the loan provider pays the builder directly. And if the loan amount is disbursed in your account and the lender approves you to make the payments, you’ll receive the money after completion of the stage of the building process. So interest is calculated on the amount disbursed in the borrower’s account and not on the net mortgage value.
3. Budget of building the asset
You’ll need the help of a professional architect to design your new building or dream home. In addition, you may also require the services of a builder, plumber, material supplier, and others. Besides construction, you’ll need to handle several overheads. So take note of all the expenses and prepare your construction budget.
Usually, construction mortgages don’t provide coverage of the construction project’s initial phase. So you’ll need to manage the finances for the period on your own. Before starting the application process, collect all the necessary information about the construction project.
4. Find a reliable and trustworthy lender
Construction loans are comparatively complex, and so is the process of finding a reliable construction mortgage provider. It is important to find a reliable lender offering a fair deal. Learn about the programs offered by different lenders. Compare the down payments, rates, terms, and conditions of the available mortgage deals.
Ensure you are comfortable with the loan’s interest rates and terms and conditions. Plus, you should be able to trust them and feel at ease with your lender as you’ll be working closely with them.
5. Create construction plans and arrange all the necessary documents
Lenders check all the relevant documents and the building plans when determining eligibility and verifying the borrower’s application. It is to be noted that the lenders approve not only the mortgage application but also the building plans.
You’ll need to submit identity proof documents, bank statements, work history, credit score, and other details for reference. Additionally, the loan provider checks the project estimates, schedule and specifications to help them make risk-free decisions regarding approving applications.
6.Get municipal permissions and land records before submitting the loan application
The lender checks the plot of land on which the building will be constructed. Plus, they verify land records and check municipal permissions before approving the loan application. Keep in mind construction loans’ loan-to-value ratio is around 75%. This means that you will have to deploy around 25% of the construction cost from your personal funds.
7. The mortgage amount is disbursed after the commencement of the construction process
The entire mortgage amount isn’t disbursed at once. Hence, you may have to arrange funds for the down payment and meet the construction process’s initial expenses. In some cases, the loan is disbursed after the building’s foundation is laid. So you should be ready to incur some expenses from your pocket.
Note that the disbursal of construction loans is done in different construction phases. So there could be multiple installments based on the project timeline submitted along with the application to the loan provider. It is to be noted that delays can become a problem here. In case of delay, you could end up paying for the construction for that particular stage.
8. Check the conditions for a construction loan extension
Loan extension conditions vary from one lender to another. Hence, it is advised to check the terms and conditions of the mortgage before applying for the loan. Also, check your eligibility and determine the amount of mortgage you can get according to your credit score and credit history.
9. Loan disbursal can be stopped at any time by the lender for any legitimate reason
Even if your construction loan application is approved and you receive the initial instalments, the lender can stop disbursal of the remaining loan amount if the project is indefinitely delayed or found stalled. The lender or its representatives ensure regular visits to the construction sites.
Loan disbursal is also stopped in case of significant alterations in the construction plan submitted with the loan application. In such cases, the borrower may need to submit an explanation for the current status of the project.
While a home loan offers unparalleled convenience to the borrowers but a construction loan should be considered under the following conditions only:
- You want the freedom to build a customized home that fits all your needs – While there are other options to finance your construction project, a construction mortgage gives the flexibility needed for building your dream house. Any restrictions don’t limit you.
- If you want to extend your existing property – A construction loan is a perfect option to extend your building. You may add a guesthouse, workshop or anything else to make the building more comfortable for living and suitable for your needs.
- You want a loan at affordable rates – A construction loan is available at different rates, terms and conditions. You need to find the right lender offering the best deal according to your specific requirements.
Keeping all the above factors in mind will make your loan disbursal process easy and help you find the right deal.