Construction loans

how do home construction loans work

Building your dream home can be an exciting experience. Taking an idea and turning it into reality can be a rewarding experience if done right. When you build your own home you can decide how you want it to be.

It is not always trouble free. Constructing a home can be a long and expensive process and there are many possibilities that things can go wrong.

If you are borrowing money for the construction of the home then the lender is also taking on the risk that something will go wrong. The major risk is what the finish building will be worth. Some of the other risks include the quality of the builder. If the builder does not finish the building it can be very difficult to sell an unfinished home without providing a significant discount on the price. Even if the builder does finish the home, if the quality of the finished home is poor then the value may be less than expected.

Lenders don’t like taking on a lot of risk and will put in measures / requirement to reduce this risk. In the case of

lending to build a home some lenders offer home construction loans, with all their strict criteria, specifically for this purpose.

Typically, a qualified and licenced builder must be engaged. Furthermore, the lender will want you to have a fixed price contract (not a cost plus) with the builder so the lender knows exactly how much it will cost to finish the building. Owner builder construction loans are available but generally only for builders who are building their own property. This means that you may have an especially hard time finding an institution to finance your project if you are intending to be an owner builder.

Having a fixed price with a licenced builder is only one of the many requirements of getting a construction loan.

Did you know that some lenders will allow you to use a construction loan for a three or even four units/townhouses development? If you are undertaking a small development contact us to go through your options.

Find out more about construction loans

Find out about the requirements and process of getting and using a construction loan. Everything you need to know.


Category: Credit

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