What Is a Construction Loan and How Does It Work?

What Is a Construction Loan and How Does It Work?

Published on 17 Aug 2017

Home loans don't just serve people who want to buy a house or an investment property. There is also a type of loan called a construction loan that is designed to help you build your dream home, complete a major home renovation, or demolish and rebuild a house.

Construction loans allow you to borrow the money for your completed home even though you don't yet have enough security for the loan because your home has not yet been built. They achieve this extending the money to you in a series of "draw downs" as each stage of construction is completed and able to be used as security. 

The draw down schedule differs from lender to lender and from borrower to borrower. Essentially, the number of draws and the amount for each draw down is negotiated between the lender, the borrower, and the builder. But it’s common that the first draw by the builder is paid for by the home buyer with their deposit.

Before the lender gives you the funds for each draw down, they will typically need to conduct an inspection of the construction site to make sure that everything is on track, on budget, and that the money is used correctly.

The payments go to your builder to fund construction. Most of the time, there are five stages when building a new home:

  • Foundation: This stage covers the foundation of the house that includes plumbing, laying the slab and levelling of the ground.
  • Framing: This includes the building of the frame of your home and roofing.
  • Lock up: This is where you builder constructs the external walls, windows, and doors, hence the term ‘lock up.’
  • Second fix: This stage is where the internal and external fittings are installed such as the fittings in the kitchen, bathroom, and other rooms in the house. Walls are ready for painting and electrical work, plumbing, eaves, and guttering are done.
  • Completion: This is the final stage of construction where the house is nearly done. It just needs a couple of finishing touches like painting, and cleaning.

If you’re planning on building a new home or planning on doing a major renovation, then a construction loan may be a perfect fit for you.

What Is a Construction Loan and How Does It Work?

What Is a Construction Loan and How Does It Work?

Published on 17 Aug 2017

Home loans don't just serve people who want to buy a house or an investment property. There is also a type of loan called a construction loan that is designed to help you build your dream home, complete a major home renovation, or demolish and rebuild a house.

Construction loans allow you to borrow the money for your completed home even though you don't yet have enough security for the loan because your home has not yet been built. They achieve this extending the money to you in a series of "draw downs" as each stage of construction is completed and able to be used as security. 

The draw down schedule differs from lender to lender and from borrower to borrower. Essentially, the number of draws and the amount for each draw down is negotiated between the lender, the borrower, and the builder. But it’s common that the first draw by the builder is paid for by the home buyer with their deposit.

Before the lender gives you the funds for each draw down, they will typically need to conduct an inspection of the construction site to make sure that everything is on track, on budget, and that the money is used correctly.

The payments go to your builder to fund construction. Most of the time, there are five stages when building a new home:

  • Foundation: This stage covers the foundation of the house that includes plumbing, laying the slab and levelling of the ground.
  • Framing: This includes the building of the frame of your home and roofing.
  • Lock up: This is where you builder constructs the external walls, windows, and doors, hence the term ‘lock up.’
  • Second fix: This stage is where the internal and external fittings are installed such as the fittings in the kitchen, bathroom, and other rooms in the house. Walls are ready for painting and electrical work, plumbing, eaves, and guttering are done.
  • Completion: This is the final stage of construction where the house is nearly done. It just needs a couple of finishing touches like painting, and cleaning.

If you’re planning on building a new home or planning on doing a major renovation, then a construction loan may be a perfect fit for you.

What Is a Construction Loan and How Does It Work?

What Is a Construction Loan and How Does It Work?

Published on 17 Aug 2017

Home loans don't just serve people who want to buy a house or an investment property. There is also a type of loan called a construction loan that is designed to help you build your dream home, complete a major home renovation, or demolish and rebuild a house.

Construction loans allow you to borrow the money for your completed home even though you don't yet have enough security for the loan because your home has not yet been built. They achieve this extending the money to you in a series of "draw downs" as each stage of construction is completed and able to be used as security. 

The draw down schedule differs from lender to lender and from borrower to borrower. Essentially, the number of draws and the amount for each draw down is negotiated between the lender, the borrower, and the builder. But it’s common that the first draw by the builder is paid for by the home buyer with their deposit.

Before the lender gives you the funds for each draw down, they will typically need to conduct an inspection of the construction site to make sure that everything is on track, on budget, and that the money is used correctly.

The payments go to your builder to fund construction. Most of the time, there are five stages when building a new home:

  • Foundation: This stage covers the foundation of the house that includes plumbing, laying the slab and levelling of the ground.
  • Framing: This includes the building of the frame of your home and roofing.
  • Lock up: This is where you builder constructs the external walls, windows, and doors, hence the term ‘lock up.’
  • Second fix: This stage is where the internal and external fittings are installed such as the fittings in the kitchen, bathroom, and other rooms in the house. Walls are ready for painting and electrical work, plumbing, eaves, and guttering are done.
  • Completion: This is the final stage of construction where the house is nearly done. It just needs a couple of finishing touches like painting, and cleaning.

If you’re planning on building a new home or planning on doing a major renovation, then a construction loan may be a perfect fit for you.