Construction loans: What can go wrong and how to avoid it

Construction loans: What can go wrong and how to avoid it

Problems can you expect when you use a construction loan for you building project and how to avoid them

Some of the most common problems with construction loans and the solutions:

Construction loan structure

Problem: The mortgage broker structured the loans wrong and this causes a problem with the valuation from the lender. You then cannot borrow enough from the lender to complete the project. You will then need to go to a different lender and this causes delays. Time costs interest and money.
Solution: Depending on what you are doing it may be better to have the land loan separate from the construction loan or it may be better to have the house and land combined loan. An experienced mortgage broker will be able to advise you on the best option once they know the situation. Contacting a mortgage broker early in your project can also mean that you don't commit to something that you can't finance with a good loan package.

Variations during the construction loan

Problem: Significant variations to the building contract or council approved plans during construction may require the bank to re-approve the loan. This can delay your project whilst the loan gets re-approved.
Solution: Only vary the contract or plans where it is really necessary or you can pay for it with your own money (not from the loan). Always check with your mortgage broker before agreeing to the variation, this will ensure that the lender will agree to the variations and the progress payments will not be delayed. You may consider putting some funds aside for variations when you are planning your project.

Communication with the lender

Problem: After requesting payment for progress on the construction the lender needs more information but fails to request this from the builder. The lender does not tell the builder that they need a document or form and withholds progress payments to the builder. The builder does not continue work until they have been paid, delaying your project.
Solution: If the lender is due to make a progression payment to the builder keep contacting the lender until the funds are released.

Read more about this here: Construction loan problems and solutions

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