Construction loan can be quite complicated and not every broker or banker understand the process of construction loan.
If you intend to purchase a vacant land then build your property on it, you can generally split your loan into two, the 'land loan' and the 'construction loan'. The splitting loans are commonly known as the Land & House package. The land loan will drawdown when the land purchase is settled. The construction loan will advance progressively when the construction progress in stages. The progressive payment of construction loan will be discussed later.
Most of the building projects go over budget. As a general rule, we recommend you to reserve some funds at least 5-10% of the building contract. There is nothing worse than running out of funds when your house is almost complete! Even if you are borrowing 100% of the land & construction cost with additional security guarantee, you should still have some funds available in the initial stage for expenses on council approval, architect design and builder's creation of building contract. This is because lender cannot release funds outside of specified progressive construction drawdown.
Progressive Payment from Lender
When your loan is approved and loan offer accepted, your builder can start the construction work. Generally the builder will divide the construction process into numerious stages and he will request for payment when each stage is completed. The lender will require you to use your own portion of contribution before requesting lender to release fund. (for example, if you borrow 80% from the lender and have 20% own contribution fund, lender will require you to pay your builder 20% before requesting for lender funds). The procedure to request the lender to pay your builder directly is the following:
The builder will send you an invoice.
You will then complete and sign a drawdown request form (available from your lender).
Send the drawdown request form and the invoice to the construction department of your lender.
The lender may require a valuation to confirm the work that has been completed so far.
The funds will be advanced to your builder generally within five working days.
Repeat this process for each progress payment required by the builder.
Tips for Construction loan
Make sure the building contract provided to the lender is the final version. Try to avoid changing the building contract after approval. Reason for this is because a small change (like $100) on the contract will require the lender to reassess the loan all over again. Re-assessment of your loan can take up to one month which can cause significant delay.
It is quite common for people to hire contractors to complete other work such as landscaping, utility connections, swimming pools or site works. Try and get all of these minor quotes included in the building contract and then have the builder pay for them. This may not work for the builder, so discuss this with us and your builder before deciding on the best way to go.
If your builder is being paid cash for their work then no lender can approve a construction loan for you. They can only approve a loan based on the current value of your property. We recommend that you always sign a formal contract with your builder, ensure they have the correct insurances in place and follow all relevant state and federal legislation.