3 Pitfalls With Construction Loans: Big traps for first home buyers!

Construction loans are a tricky thing, especially for first home buyers to get right. We do a lot of construction loans here at Mortgage World Australia and I can say from personal experience that even more experienced buyers slip up from time to time. That said building with the right construction loan is a great option for getting you your dream home.

Just avoid these three construction loan pitfalls:

Be Sure You Are Comparing Apples To Apples With Your Building Contracts.

Not all building contracts will actually deliver the same end result. So when one builder looks significantly cheaper than another, it is usually because of what is NOT included in the contract that makes it seem cheaper.

Be sure to understand specifically what is and isn’t included. Things like floor coverings, driveways, and paths, landscaping, even a letter box or clothesline may or may not be included. Be sure you understand because if they aren’t included that could be a whole bunch of extra expenses you can’t afford right away, or you have to deal with after moving in. It may determine how much you want to borrow for the build.

It can be a right royal pain in the neck to manage/coordinate the trades yourself especially if the builder has and enforces a provision for no outside trades until after handover. But if you get the work done through the builder, you’ll be paying their mark-up as well.

There is no right answer here, just a case of buyer beware.

Careful With The Progress Payment Schedule in the contract

Signing a building contract without finance in place can be a problem if your lender and their valuer haven’t reviewed the progress payment schedule. A typical building contract often requires 5-6 progress payments at various milestones. Lenders often require that the builder only bills you a total of 20% of the contract by the time the slab payment is due. If the builder asks for more, the bank may demand the payment schedule be amended.

Similarly, lenders will often want the payment schedule amended when the final payment is less than 10% of the total contract.

When the lenders demand an amendment and you’ve signed a contract with the builder, it can result in a Mexican stand-off with you stuck in the middle, while neither side is willing to give an inch. It can be a very stressful situation for you.

So, it is always wise to obtain unconditional loan approval before signing the building contract.

Lenders Want A Fixed Price Contract

Keep provisions out of the contract as much as possible, lenders want you to complete your project and they want to be guaranteed that you’ll have a house at the end of the build. Lenders don’t want to be asked for an increase mid-build because, for instance, the site costs ended up being higher than expected.

A good builder should be able to deliver a fixed-price contract just fine. The most common provision is for site costs and they can be safe if the builder does a soil and geology test before they start.

With rising building costs, some builders prefer a cost-plus contract but this can be difficult to finance since most lenders require a fixed-price building contract.

Getting a construction loan is a great way to get your first home or your dream home and we do a lot of them here at Mortgage World Australia. Before you talk to a builder, get your ducks in a row with your finance by calling 1300 661 211 or register online at https://www.mortgageworldaustralia.com.au/contact-us/ and we can help you navigate these waters