Many people are choosing to construct their own house instead of buying it. And the reason is simple. First and foremost, you will own a custom made house instead of a conventional one.
Secondly, you will love the thing you have created yourself the most and proudly call it ‘your home.’ And lastly, your house will be made out of the best material. So, expect low repair costs.
But as easy as it sounds, building your house is not a cakewalk; the primary reason being finance. It is highly unlikely that you already have all the money you need to build a house.
So, you will go to a lender to lend you the money.
When a person goes to a lender to get a loan, that loan is referred to as construction loan or self-build loan. The loan is short-term in nature and comes with a high rate of interest.
You will have to convince the lender to loan you money for something that does not exist yet.
The risk involved is very high, and no one wants to lose their money. That is why the rate of interest is higher than traditional loans.
5 steps guide to construction loan
Assess your financial situation:
Know about your credit score, debt, savings and annual income. Prepare documents regarding your daily expenses, investments and tax payments.
After you have all your documents, go for a pre-approval. It will give an idea of how much you can borrow. This will provide a rough idea about your budget for further planning.
Select builder and land:
The next step after knowing your tentative budget is to find a good builder. Based on builders’ previous works, builders’ reputation regarding completing work on time and in the budget and the prices quoted by them, select the best builder who will work on your dream home.
Some builders’ reputation increases the chances of getting a loan.
Purchase a suitable land if you don’t own one:
By now, you will have a complete idea about the money you need. You will also have a concrete plan to impress the lenders.
Apply for a construction loan:
Now that you have a blueprint of how to go about building your house, visit money lenders, banks and credit unions. Show the lender all your documents.
The documents decide how much loan can they provide. It is not necessary that your loan will be approved in one session.
The lenders are supposed to give money for something that’s just in papers. They do not want to invest in a bogus plan. Therefore, you will need to convince them about your credibility and liability.
Once your loan is approved, you will have a fair idea about how much money you actually have in hand. Now, it is time to reconsider how you will be spending the money.
Fix your mortgage loan:
A construction loan is a short-term loan. That means after the period (6-12 months) is over, you will be required to pay back the entire amount.
So, look for lenders who will roll out your construction loan into eventual mortgage payments. If your lender does not provide you with such an option, apply for a separate mortgage loan.
This will ensure that when you need to repay the loan, you will have everything settled.
Once everything is fixed, make payments to builders and for materials on time without worrying about the cash. This will help you surf a smooth wave while making your home.
But this will only be possible if you pay interest on time to your lender. Lenders provide money either before the beginning of a construction stage (advance type) or as the construction stage gets completed (arrear type).
How much loan can you get?
A single applicant can get a loan 4.5 times their salaries. Whereas, joint mortgage applicants can get 4.5 times the higher salary plus the second applicant’s salary or 3.5 times their combined salaries.
However, it is not necessary that you will get that much of loan. The loan amount depends on your ability to pay it back.
So, your credit scores, other loans, debt and investments will affect the loan amount. It is better to improve your credit scores before applying for a loan.
To improve your credit scores avoid taking new loans and pay your credit dues on time for at least three months.
What documents will you need?
Acquiring basic documents required for a standard mortgage is a must. Along with those documents, you should keep some other documents ready.
- Copy of planning permission
- Copy of total cost estimate
- Copy of construction drawings
- Copy of details like floor, materials to be used, etc.
- Copy of Building Regulations approval
- Standard Assessment Procedure (SAP) calculation
- Copy of structural warranty and sire insurance
Things to keep in mind while building a house
- Always negotiate. Whether it’s your builder, the landowner or your designer, always ask for the best price. This will cut down unnecessary expenditure.
- Use the best materials. Instead of using ten cheap things, use one expensive thing. Never compromise on the building materials and basic house furniture. Everything extra can be bought later. This will increase the life of your house and cut down the repair costs.
- Usually, lenders require 20% down payment on the loan. Some even demand a 25% down payment. Always arrange funds in advance.
- If you have an existing property and wish to move into a new one, you can opt for bridge loans.
- Rate of interest for construction loan varies from 4-6.5%.
Although construction loans offer you to build a house without money, do not compromise on your food or clothes while building a house.
You can always wait for some time to save more money and increase your credit scores for less burden of the loan.