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How Do You Finance Property Development & Construction Loans?
Did you inherit some land? Maybe you have some extra cash laying around and bought a bit of land in the country. If you are saving up for your retirement home you may not have a house in mind, but you may know where you want to be. Regardless of your situation, a traditional home mortgage and a design-build mortgage are different beasts. They aren’t complicated. You just need to understand the basics and know what you are getting yourself into before you make any big decisions.
When you are ready to pull the trigger on a new construction or property development deal, you need to speak with a mortgage broker who can educate you on the type of property finance you need to ensure that your vision is fulfilled. This article dives into the few necessary questions you will need to answer so you can make the right choices as part of your home build project.
What Are You Looking to Do?
You may not know the answer to this, but you will need to continually think about it until you do have an answer. Start at the beginning. Assuming that you are looking for property finance and property development, it is safe to say that the home or homes you are looking to buy aren’t actually built yet. These could be homes for you or that you are going to sell on the market. Regardless, there are no physical structures and you don’t have the initial capital to build them. Otherwise, you wouldn’t be here.
However, congrats that you are here because you are now that much smarter for the choice. If you don’t have an actual house that means that you could only just have the land. Whether or not you have the land isn’t significant for the type of mortgage, but it does affect the loan amount. Don’t worry about not having purchased the land. All you need to do is to ensure that you know where the land is, can identify it, and have a design-build crew ready to go.
If You Are Buying Land, make sure to Build on It
Whether you have inherited the land or are going to buy it, you need the funds to build the house. If you haven’t purchased the land yet, the loan will include an added amount to buy the land. The basic idea of property finance, property development, or what is called a construction loan or design-build loan, is that a bank fronts the costs of the construction of the home for a mortgage on the improved land. The bank is thinking that it is a good deal to front the money if it means that they will have a mortgage on a newly constructed home. That is why, whatever land you are considering buying or have inherited, that is the land that you will need to use for the design-build new construction loan.
Please keep in mind that when you obtain a construction loan from a bank, the bank will want you to begin construction within 12 months of the receipt of funds for the land purchase. This time should be used to clear all hurdles (permits, planning, etc.) needed before construction begins. Lenders neither intend for nor like for their funds to be used in hopes that the raw land will increase in value and provide the owner a capital gain.
What Type of Loan Is A Property Finance Loan?
As was mentioned, there is only one main type of construction loan for new development. This is a traditional home mortgage. The main difference is the initial setup of the loan and distribution of funds. The bank doesn’t want you to just take the money and use it on another property. Further, it doesn’t want you to take it and just build whatever you want. The bank will not give you a loan for the value of the un-improved land. There are no land mortgages unless the land is a source of income, like a pasture for animals, or like a field for growing crops. Instead, the bank loans you the funds with the intent on the land being developed into an improved lot with a home or business. This means that you will have to ensure that you file the design-build plans with the bank. A bank engineer approves the plans and that the bank approves of the value of the home such that you can get enough to actually build the house that you want. In New Zealand there are two types of construction loans:
Traditional Construction Loan- this type of loan is provided to a borrower who intends to build on the raw land. It is the borrower’s responsibility to complete the purchase, planning, zoning, which includes the resource consent (setting up all utilities and services), building consent, and then begin (but not necessarily complete) a new construction within12 months. With a construction loan, the lender will gradually release funds as needed for the build; funds are not provided in a lump sum.
Purchase from Property Developer Loan- this type of loan is provided to a borrower who is buying an off the plan home. The development company will be taking care of much of the process that the borrower would be doing in the Traditional Construction loan. Most builds should be completed and ready for inspection and move in within between 4-6 months. The lender considers this type of loan the same as a home that is already built as the end result is a completed house. In most cases, the lender will provide a lump sum and mortgage for this kind of loan.
The main difference between these loans is that the construction loan is for those that have building experience and can get an overall lower price to build and higher profit than a borrower choosing the second option who has less experience or does not want to deal with the time and paperwork needed and thus happy to forgo any extra profits.
Don’t forget about the other fees associated with building on an empty lot. Depending on where the property is located, you may need to run electricity to the lot or water or other city or town municipal services. Further, if there are no local municipal services around, you may need to install your own well, septic system, or even solar power generation units. These actions all cost money. Even the engineering work to design the home costs money. Your local community, if you are building within a city’s boundaries, may have zoning laws on new construction. This could include permitting, which always costs something. A mortgage broker can help with the process and get you in touch with the right people.
Can Anyone Get A Construction Loan?
As long as there is value in the home that is being built, then a construction loan or property finance funds are available to help with the costs associated with immediate contractor bills. Don’t let things start without securing the financing upfront. This will ensure a smooth construction schedule and put your mind at ease by assuring that the contractor will get paid. They will also be happy because they will know that they can purchase the materials and equipment and pay their employees for the work done. The worst thing would be to allow the contractor to fear no payment on a bill for your dream home. Instead talk to a broker about your needs and your situation.
Your financial situation will always be used to help gauge what type of loan is best for you. Never think that your circumstances mean you can’t have a nice place to live. Instead, you should speak to someone, like a mortgage broker, who has access to a wider selection of financial products that may fit your life needs better. Several factors can go into the decision of what loan is best for you. Not only does your income, credit history, and available cash matter, but your current home’s equity can also affect things. We are experts in this field and can help find for you both bank and non-bank lending solutions that best fit your individual needs.