How does a construction loan work?
A construction loan involves the financing of payments to construct a property. Construction loans can be fiddly, but if lodged with the correct lender and with correct documentation, the transition is very easy. In many respects when people seek a construction loan they usually involve a licensed builder. Hence a potential borrower would need to provide the lender with a fixed price building cost estimate or fixed price tender or builder’s quote. A fixed price tender or quote from a licensed builder usually breaks up the cost to construct into a 5-part progress payment schedule.
What is a progress payment schedule in a construction loan?
A progress payment schedule is the 5-part payment breakdown of the costs required to build the subject property. This is made up of the following:
- Lock up
Different builders could use slightly different terminology to describe the above, but the bottom line is to provide a breakdown of the construction in building stages. At all of these stages mentioned, the builder will give a costing for the particular stage. Hence at every stage of the construction there will be a costing, which all 5 stages will add up to the final building price. The builder will determine the cost for each stage of the construction in the progress payment schedule.
How do lenders make payment with a construction loan to the builder?
Payments for a construction loan or mortgage are made using a Progress Claim Form Request. For example, once the first stage is complete, the lender will advance payment for that part of the construction. When the second stage of the construction is complete, the lender will advance the cost for that part of the construction and so on until completion of all five stages.
What is a progress payment claim in a construction loan?
During construction, the borrower or the builder will submit to the lender a Progress Payment Claim. This is a template claim form for payment which is usually faxed to the lender, and the lenders will usually action the claim within 24 hours. This template generally comes in the loan offer or supplied by the lender when the client signs the loan offer. Our construction loan specialist will be able to show you how to do this when taking your loan application.
What type of paper work does a lender look for before issuing an approval for a construction loan?
To qualify for a construction loan, you must have a building permit. This is commonly known as a Development Approval (DA), and a Construction Certificate (CC). These are received from the council when building plans have been drawn up in accordance with the Building Code of Australia (BCA), and have been approved by council. Further for a construction mortgage to be approved, the lender will be seeking the necessary insurances like builder warranty and public liability.
Once the council work has been completed in order to grant approval, you will approach a lender to raise the finance for the construction. There are 2 building financing methods when taking on a construction loan. As mentioned previously, you could be seeking a licensed builder loan, or an owner builders loan. These 2 types carry slightly different documentation requirements which our construction loan specialists can explain at the time of taking an application.
Further a lender is also looking at determining the general affordability or serviceability position of the borrower. So in this case, the lender will also be looking at the applicant’s income documents or low doc declaration to determine if a borrower can afford the loan.