This is a common question that I often get and most people look towards their mortgage brokers or bankers for the right answer.

Unfortunately there is a lot of brokers / bankers (not all) that don’t actually understand how the construction process works so they provide you with very poor or the wrong information.

So let me just start by creating a distinction here:  a construction loan process is a VERY different process to that of a standard residential home loan.

Just because your broker has done ALL of your previous loans and you have been with him / her for the past 20 years, does not mean he / she is your best option at obtaining your construction loan.

I would strongly suggest that you make sure that your broker understands how construction loans work and he / she has done a few of them in the past so you can get the best possible results.

Overview

In this blog, I will attempt to provide you with an overview of how the building process generally works and then explain how and where finance actually comes into the whole equation.

Before we get stuck into the build stages, let’s define the different types of “loan approvals” for the purposes of our construction process:

Financing Advice

I have written a blog on Finance 101 where I discuss the following in a lot more detail.  However I will discuss them at a high level below…

General Check

This is when you check with your broker / banker how much you can borrow (and if you can borrow).  It’s a good indicator and may give you the peace of mind you need to proceed with your project given that they know your personal position and circumstance.

There are also so many calculators that you can also use, try the following links.  I am not recommending them by any means but it may be worth checking out…

Pre-Approval

A loan pre-approval means that a lender has agreed, in principle, to lend you money towards the purchase of your home construction or home & land package, but this is not a full or final approval.  It allows you to know your maximum available funds so you can narrow your search.

This type of approval will generally be conditional subject to a number of “conditions” that you have to satisfy before obtaining your final approval and to the lender finally approving the loan.

This is NOT a guarantee that you will actually get your loan approved.

Final Loan Approval

This is when the hammer hits the nail on its head.  You have your final approval and you are good to go.

Believe it or not, the bank can still reject the loan at this stage if they suspect fraud or they find out that they have missed something completely.  This is unlikely to happen of course but entirely possible.

Home Building Stages

Let’s now look at the build stages in relation to obtaining loan approvals and consider the importance of timings.  In my other blog, “how long does it take to build?“, I go into more details around the build stages.

However I will provide an overview for ease of reference below:

Stage 1 – Site Investigation

This includes obtaining all the reports, selected design, compliance checks, detailed drawings and signed agreements.

Before you start this process, I strongly suggest that you speak with your broker to understand how much you can borrow.  Please note that you cannot obtain your formal approval just yet.

Recommendation:  A general loan borrowing capacity check is more than sufficient when you are starting your construction journey.

Please note that some brokers will tell you that you have to get a pre-approval.

While I understand their approach in mitigating your risk, a pre-approval is not worth the paper it’s written on in the context that the bank can change their minds at any moment.

Additionally, your pre-approval is generally valid for 3 months.  It will take a lot longer than 3 months to get to a point where you are ready to finalise your loan.

In my opinion, a general check is as good as a pre-approval in the sense that your broker / banker should know your circumstance and what you can / cannot do.

Once you are ready, they can get to work on getting you the loan amount that you need.

Please also remember that pre-approvals will be visible on your credit file as a loan enquiry, and having many in quick succession and with multiple lenders might create the impression that you’re financially unstable and will actually work against you.

Just ask your broker / banker about the effects of pre-approvals on your credit rating

I trust my mortgage broker and when he tells me that I can borrow a certain amount, I know he will be able to get it for me.

Stage 2 – Pre Construction

As the name suggests, this is the stage before your construction stage starts.  It’s when you do you colour selection and obtain your building approvals.

This stage should provide you with the final documentations that your bank will need to provide you with your final loan approval.  For more information, please refer to this blog.

Stage 3 – Formal Loan

Now that you have your plans approved, your tender finalized and you finished all of your colour consultations; it’s time to get the money.

It would work really well if you have a really really really good broker who understands construction loans and can help you with obtaining your finance.

If your broker says you cannot get a loan, always get a second opinion.

Stage 4 & 5 – Construction & Maintenance

I combined the two stages as they are irrelevant to the loan process discussion we are having in this blog.  However if you want to know more, please visit the how long does it take to build?  blog.

A Note

Please note that this blog is simply based on experience around what actually works and what does not work.

Always work with a great broker / banker that understands your position and that is the most important factor to all of this.

I strongly suggest that you obtain independent advice from your broker / banker as the content in this blog is NOT advice, just opinion based on general experience.

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