Construction loan for dream house

How construction loans help finance your dream home?

Buying your dream home, or building a house replicating your desires, is a matter of huge financial investments and involves a lot of time, and other construction-specific details. Often in the modern market, it is not feasible to fulfill that dream without the help of proper funding or a construction financing option.
Constructing any kind of property requires a flow of cash and the financial aspect of the whole matter is the prime factor that leads to success, and proper execution. Construction loans in Australia are the most popular and preferred medium of financing the construction of a property.
Construction loans have become extremely popular in recent times for its convenience and ease of approval. It has various repayment methods that have made them a preferable means of construction finance. There are different types of construction loans available in the market, which are termed to suit various kinds of needs.

Construction financing options available for business owners

There are three main types of construction financing options available for you.

1. Construction to permanent loans (aka ‘single close’ construction loans)

Single close construction loan is a kind of financing that has a single closing process and combines construction loan and standard mortgage to avoid the situation of refinancing or payment of multiple settlement fees. The lender provides funding during the construction process, and you only pay interest amounts during the building of the property.
As soon as the construction is completed, the loan converts into a standard mortgage and the borrower starts paying an amount that includes both the principal and interest, in parts. These loans come at fixed and adjustable interest rates and usually have lower rates of interest. It is a very popular form of easy business loans available in Australia.

2. Construction only (also known as ‘two close’ construction loans)

This kind of construction loan requires the borrower to pay off the full loan amount as soon as the construction is complete or at the point of maturity of the loan amount (which is usually a year or less). The lender provides the funds during the progress of the construction process, and the borrower needs to pay it off soon after completion, or obtain a standard mortgage to refinance.
The loan funds are disbursed in parts, based on the progress of the project and the interest rates are variable. Such loans are a popular type of  construction loans in Australia.

3. Renovation construction loans

This kind of construction business loan funds major expenses of the renovation of a property and is based on the value of the property after renovation and repairs. The loan amount is converted into the mortgage instead of financed after closing. Renovation construction loans come in different forms.
Construction business loans  are a form of fast business loans that finances various kinds of projects that include:

  • Plans, permits and fees
  • Labour costs
  • Contingency reserves (when the project exceeds estimated budget)
  • Interest reserves
  • Land and material costs
  • Other overheads

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Who can qualify for construction business loans?

Banks and similar lenders are very wary of the criteria and conditions of providing such financing, with terms like a good credit score, proper project planning, debt-to-income ratio, down payment amount and repayment plans.
When it comes to lenders who provide loans without requiring extensive documentation, they either rely on credit score, or the down payment amount and usually charge a higher rate of interest.

Choosing a lender

Interest rates, repayment methods, criteria and documents needed for approval, and downpayment required are the important things to consider while choosing a lender. Easy business loans are provided by various lenders, hence the right choice must depend on these factors, along with the competency of the loan terms with the project.
Also Read: How construction businesses can use small business loans effectively?