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Construction Loan Criteria: Do You Meet the Minimum?

Work in progress home construction

A construction loan is a loan that you take out to fund the building of your home. It can also help you pay for renovations, extensions and improvements to your house. The amount you borrow will depend on the value of your property and what type of work needs doing. You’ll need to meet certain criteria before applying for one though, and we’ll discuss the construction loan criteria in this article.

Understanding the different types of loans available, and indeed the different ways of buying or building a new home is important. You can buy a house and land package, you can buy an existing home, and typically the home loans are much the same for these. But if you buy your land separately and hire a builder for house construction, a construction loan is a smart way to go.

Let’s find out all you need to know.

What is a construction loan?

A construction loan is a special type of loan that allows you to buy the materials and pay for the labour needed to build a new home. These loans will be slightly different for every lender, but they all have some similarities.

Essentially, because the house is still in the construction phase, your lender distributes funds at certain intervals throughout the build. This is known as a drawdown. You are, however, given a total loan amount that the bank is willing to lend, and this is still the total amount you’ll owe when you move in. In some cases, the lender may give you the option of having an interest-only loan for the amounts distributed during construction, and then switch to a standard loan once the build is complete.

However, by drawing down the funds in intervals, your home loan gradually increases. This protects the bank’s investment too because they are effectively only helping you pay the builder for work that is done. So, if the building stopped for some reason, the bank could still essentially sell the property and recoup your loan amount.

Who needs a construction loan in New Zealand?

If you’re planning on building a house, renovating your home or building a new commercial building, then you may need a construction loan. As we mentioned before, the most common situation is when you buy land separately, and then build your home on it. You’ll likely already have part of the loan to pay for your land purchase. The remainder of the loan is distributed in intervals during the build.

How do I apply for a construction loan?

To apply for a construction loan, you can do so online or over the phone with most lenders. Be pre-warned, though, you’ll need a decent amount of paperwork just like any home loan you apply for. However, the bank will want further information about the build stages and timeline, as well as all of the other financial documents you’d typically need to provide.

Ideally, your builder should know what sort of documents they need to provide you with if you’ve chosen a construction loan. But if not, your bank or lender will guide you. During the build process, the lender may also require confirmation or evidence that each stage of the build has been completed to an acceptable standard before they release funds.

The benefits of a construction loan

There are a few benefits to choosing a construction loan. Most attractive is that it’s paid out in stages. This means you start with a smaller home loan while the house is being built. You can also choose interest-only options to make it more manageable. In fact, many lenders don’t even require you to make payments until the loan is drawn down in full.

It’s also attractive for builders because they get a steady stream of income while building, rather than waiting until the end of construction. Another benefit is the fact that you can get conditional pre-approval, so you know what you’ve got to spend.

What are the construction loan criteria in New Zealand?

To be eligible for a construction loan, the criteria is:

  • It may be possible to get a construction loan with a deposit of 5%, but many banks request 10% or 20%.
  • You must be an owner-builder (someone who is building their own home) and not an investor or developer.
  • Must be a New Zealand citizen or permanent resident with a valid New Zealand passport or birth certificate. You can also apply if you’re on a work visa and have lived in NZ for at least 1 year before applying for your first home loan, but the amount you can borrow may be limited depending on your income.
  • Must meet all financial requirements as specified by your lender (income, etc)

As we touched on, every lender is different, and they may all have individual requirements. The above list is not exhaustive, so it’s best to check directly with your lender of choice to understand the full construction loan criteria for your circumstances.

Do you meet the construction loan criteria?

Whether you already have pre-approval for a home loan or you’re just in the early planning stages of building a new home, Stonewood is here to help. We’re your trusted New Zealand building company offering beautiful home designs, custom homes, and also house and land packages. So, if you want a team of experts on your side to guide you through the process, contact Stonewood Homes today.

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