If you are a DIY expert or do not see anything you like on the market, building a home may be the best option for you. After all, you can design the layout, decide how many rooms you want, and handpick all the finishes and extras. Building a one-of-a-kind home is an exciting endeavour, but before any bricks are stacked, you need to sort out the finances first.
Most people do not have enough money to be able to cover construction costs on a custom home, which means they will need a loan. Getting approval for a loan on a self-build project is more difficult than on a built house. It is relatively easy to get a standard mortgage if you have good credit and reliable income. It is almost impossible to get a standard mortgage if you are building your own home because you are essentially asking the lender to finance something that does not exist yet and construction is a risky process – lenders do not like risk.
Fortunately, there are a few steps you can take to get a loan to build your own home:
Sometimes called a self-build loan, it is a short-term loan (15 months max) used to cover the expense of purchasing the land and construction costs for your new home. The variable rates are generally higher than on conventional mortgage loans. After the construction project is finished and you have obtained an occupancy permit from the city, you can then apply for a standard mortgage to simply pay off the loan or refinance and apply for more funds.
Once you know you are going to apply for a construction loan, prepare to get all of your paperwork in order. These loans require a lot of prep on the borrowers side. You will need to provide sufficient evidence to prove your project is real, viable, and low-risk for your lender. This evidence includes paperwork of project timetables, a realistic budget, supplies list, and construction details like floor plans, type of building materials, and ceiling heights. Professional builders will have a blue book that includes these details.
Buy the Land
You can borrow up to 65% of the land value, or if possible, purchase the land ahead of applying for a construction loan. Doing so will be beneficial to the construction loan application as it shows the lender that you have sufficient funds to cover the project if it goes over budget or takes longer than expected.
A qualified builder will help your chances of approval for this loan as they will be licensed and have an established home-building reputation. Getting approval for a construction loan is mainly about proving legitimacy. If you plan on being your own contractor, there is a slim chance of approval for a construction loan. You can increase your chances by providing a thorough construction plan that can confirm your building knowledge and capabilities. Be sure to add a contingency fund for unforeseen expenses.
Building your own home can be a rewarding process but getting approved for a construction loan can be a challenge. Being extremely prepared, applying as early as possible, and hiring experienced professionals can increase your chances though.