Home Construction Loans

An investment in real estate is arguably one of the best financial investments you can make. Real estate by virtue of it being a tangible, physical asset, remains one of the most stable instruments to invest your hard earned cash on.

Why real estate is such a good investment

  1. Positive Cash Flow: A real estate investment has the ability to generate positive cash flow and steady passive income.
  2. High tangible asset value: There will always be a real and tangible value in your land and value in your house.
  3. Value appreciation: Real estate property prices in Zambia increase annually. Supply shortages and scarcity of land are all reasons why prices are always on the rise.
  4. Portfolio diversification: Investment diversification is important to spread out the risk. Real estate will serve as a safe tangible asset to mitigate the risk in your investment portfolio.

The biggest barrier to owning your own property is having sufficient funds to cover the cost of the property. The best workaround is to access a loan to help in the acquisition of the property. There are various types of home loans on the market and you can pick a loan that works best for your circumstances.

Types of home loans

Fixed rate loan

Defined by a single prescribed interest rate and monthly payment. An interest rise or fall will not affect your overall home loan.

Adjustable rate loan

Payments correspond directly to current interest rates. An increase in interest rates leads to increased payments. A decrease in interest rates means you pay less.

Construction loan

Refers to any value added loan used to finance the construction or renovation of a property.

Home Construction Loans

Home construction loans primarily facilitate for the payment of homebuilding or renovations. When it comes to home construction loans the approach, appraisal and disbursement processes vary from conventional home loans. Home construction loans are much higher interest rate and shorter term loans that cover the cost of building or renovating a house. The lender makes payment to the contractor in installments as construction progresses. When construction is finished, home construction loans are either converted to permanent mortgages or paid in full.

The home construction loan process can be quite daunting, but we look at how the different types work.

Home construction loan types

Home construction loan types
Home construction loan types

What a home loan covers

  • Land
  • Plans, permits and fees
  • Labour
  • Materials
  • Closing costs

In some instances and depending on the lender,

  • Contingency reserves, in the event the construction costs exceed the estimate.
  • Interest reserves, in the event the interest payments are not during construction.

How a home construction loan works for a new house

The inspection process is quite thorough and carried out with  fine-tooth comb. A comprehensive examination of the architectural plans, contractor and your finances is carried out as there is no collateral to cover the loan. Disbursement of the construction loan is done in installments called ‘draws’ to the contractor. Each draw coincides with an important phase of construction.

How a home construction loan works for a renovation

The loan amount for a renovation is based on an appraiser’s estimated value of the repairs and upgrades. The lender has to approve your contractor and renovation plans. The loan is still disbursed in installments.

Contractor review

Success hinges on the contractor’s ability to complete the project on time and within budget. It is critical to pick a competent and reputable contractor. A lender will request to review the contractor’s work history and proof of insurance. Also required are;

  • detailed budget,
  • signed construction contract,
  • materials list,
  • blueprints 

How a home construction loan works

The home construction loan aligns with the payment scheme the contractor puts in place. Invoicing by the contractor is done at the end of each stage of construction. The lender then releases the next loan payment for the construction. After receiving payment the contractor proceeds to the next phase of construction.

Banks and lenders structure their home construction loans differently. Below is an example of a five stage construction schedule.

Example of a five-stage construction schedule
Example of a five-stage construction schedule

Additional documents required together with the loan application documents, include:

  • A signed and dated building contract.
  • Progress Payment Schedule (PPS).
  • Council approved plans for your construction.
  • Quotations for any additional work to be funded by the loan.

Do you have to put a down payment on a home construction loan

As with a standard home loan you are required to pay a deposit. The greater the deposit you pay, the less the risk you pose to the lender. It is also important to save as much as you can before commencing work and throughout the construction as many people go over budget.

How ‘draws’ work on a home construction loan

A home construction loan aligns with the progress payment scheme. Each progress payment is called a draw and interest is charged on the amount drawn at the time.

Whats the interest paid on a home construction loan

With a home construction loan interest is paid on the amount you draw down. You pay interest on the rest as the construction continues and you draw it down.

How to qualify for a home construction loan

Lenders will review your:

  1. Debt-to-income ration: A healthy debt-to-income ratio means your debts total no more than 45% of your income. The lower the better.
  2. Credit score: Lenders will require that you have a good credit score.
  3. Down payment: A 20% – 30% down payment is typically required for new construction. Some home renovation loan programs may require less.
  4. Repayment: Lenders will require to know if you’ll pay all the balance in cash or refinance when the construction is finished.

 

Compare listings

Compare