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Obtaining Finance is very critical in the process of building your home; unless you have plenty of cash and you don’t need the bank to lend you money.
However if you do need the bank’s money, here are some facts that you need to familiarize yourself with – in the Context of Finance for Construction of course.
Financing Advice
There are different ways to obtain financing advice – this is generalization of course and it is not financial or brokering advice.
So please speak to your consultants and advisors :).
General Check
This is where you have your broker or banker check whether you can borrow the money you want / need. A construction loan or a loan for a home & land package is VERY VERY different to a general housing / residential loan.
So if your broker / banker has not done it before, it will make for a very hard and inefficient process. They are not the same and if they tell they are the same or similar process, it’s a red flag!
Pre-Approval
This is essentially a “piece of paper” that states how much you can borrow subject to certain conditions. It is generally valid for 3 months beyond which you have to re-new of course.
I must warn you though, in the context of construction or purchasing a home & land, a pre-approval can be completely useless and not worth the paper it is written on for a few reasons:
- It is Conditional – that is, it is subject to a number of conditions. If you meet these conditions, then you will get the loan. However these conditions may change between the time you obtain the pre-approval and the time you actually go through and obtain the final loan. Plus even if they don’t change, they are conditional which means that you don’t really have the loan approved.
- 3 months is not nearly enough – building a home or purchasing a home & land takes time. There are so many red tapes and so many governmental processes that a builder must go through before obtaining your final approved plans, which is a prerequisite for you to obtain loan approvals. By the time the builder obtains your approved plans through council or the private certifier, it’s likely that your pre-approval would have expired.
- Negative Credit Rating – at the time of writing this blog, every time you obtain a pre-approval and do not proceed with the loan or having to renew it at some point; it may actually work against your credit rating. So if your broker / banker tells you MUST obtain a pre-approval before buying – you must ask them:
- what happens to my credit rating if I don’t get the loan on time?,
- how often do I have to re-new it before the builder obtains the plans approval? AND
- do you (broker / banker) actually know and understand how the construction process work?
Formal Loan Approval
In order for you to obtain final / formal loan approval, you must have:
- Approved Plans via DA or CDC
- Signed Tender from your builder
- Signed Building Contract
Your broker / banker will need the abovementioned items along with your payslips, bank account details, etc… to submit for the final loan approval.
Once all is approved , you will obtain a “commencement letter” from the bank to your builder basically saying: “The money for this home construction is ready to go, let’s get started…”
Timing
I have a lot of clients saying that they must obtain pre-approval before proceeding or taking any step. While this may be true in some circumstances, it may not well be in other circumstances. It’s important to note that nothing a good broker / banker cannot tell you using a General Check; that a pre-approval can.
If your broker / banker is any good, they should be right on the money with whether or not you can borrow and how much you can service.
I am not suggesting that you do or do not obtain a pre-approval, I am merely saying that it has consequences and may not work the way you think or you broker / banker tells you that it would!
The Right Time
The most appropriate time to obtain formal loan approval is when:
- your plans have been approved through the approving authorities and
- the tender / final tender / final contract documents are ready
You want to speak with your builder to find out 4 weeks out if possible from when you are going to get your plan approvals. That way you can have your broker / banker start working on your application.
I have written another blog on when you should be getting your home loan, detailing how the construction process works in relation to the financing process.
Broker or Banker?
This is a personal choice really but I prefer a broker every single day of the week. This is because:
- brokers will go and hunt for the best possible deal for you – who can give you the money? best rates? best package deal etc…
- brokers don’t charge you anyway as they get paid by the lending institution
- brokers will make sure your application stacks up before submitting it. They will put a plan to fix any issues and have your application presented in a more favorable way to the bank.
However, if you do go direct to the bank, anything they see is recorded in the system and it may work against you rather than for you.
Having said that, be mindful like any other business, the broker will tend to go for the lending institution that will pay them more commissions. So you being informed and educated around the financing process will help.
Finally
Choosing the right partner for your financing journey is imperative. Your finance partner can make the process super easy or really stressful. Please remember that you MUST obtain your own advice from professional and licensed consultants and advisors.
The above is simply a result of years of experience!
