Construction Financing: 5 Steps to a Great Loan Deal

Every year, millions of homeowners worldwide use construction loans to build their dream homes and to finance major renovations.

A construction loan is financing that covers construction of some kind. It takes care of construction costs while the project is in progress.

Follow these steps when sourcing for cheap construction loans for your dream home:-

1.) Shop around for a financial institution that offers the best rates and terms on construction loans to prospective homeowners.

Unlike straightforward mortgage loans, construction loans are complicated and you can easily get into repayment problems if you are not well informed.

Ask all the necessary questions regarding your loan amount and the repayment methods to ensure everything will work according to your plans.

2.) Get the lending institution to pre-approve you so they can determine how much loan you can afford. Don’t hide anything or misguide the loan officer as this may get you into problems later on.

Explain whether you plan to rent out the house or it will be owner-occupied and, if so, how long are you planning to occupy the house. All these factors will determine whether or not you will manage to repay your loan using the available finance option.

3.) Discuss with your loan officer about the interest rates. You may agree to let the interest rates float (hoping they will not shoot up) or to lock them at an agreed percentage.

Ask whether the rates will remain the same after completing your house and converting the loan into a mortgage.

RELATED: How to Find Cheap Mortgages

4.) Hire a reputable contractor for the project, since the lender must approve the builder before it agrees to finance the construction.

Enter into a written construction contract with the builder, clearly outlining the responsibilities of each party as well as the amount the builder expects to receive (including any contingencies).

Tip: You may ask the lender to recommend companies they have already approved to quicken the process.

5.) With the help of your architect, design a house that is within the amount provided by the lender after the initial approval of your construction loan application.

You must be as accurate as possible because before releasing the funds the lender will ask an independent valuer to look at the house plan to determine if the house is within your budgeted amount.

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