Few lucky people can afford to build and decorate a home for cash. The vast majority of us, if they did not hit the famous “six” in the book, must use a loan or decide to renovate the inherited property. Building a house is one of the biggest investments that we can burden our budget. Therefore, it will not do without a thorough analysis of both our financial resources and available bank proposals. Let’s find out what to consider if we decided to take out a home loan.
Home construction loan or mortgage?
We ask this question for a reason – these two terms are often confused. Although they have one goal – to make us become property owners, but they differ in the way we achieve it. Let’s start with the fact that a mortgage is definitely easier to get. If we meet the bank’s requirements, we will know the decision within a maximum of 21 days and (and most often in the form of a one-time withdrawal!) We will receive the amount we requested. A home loan is a much more complex product. It not only consists of two stages (construction stage and stage after putting the house into use), it also requires the submission of a much larger number of documents.
In addition, the lender monitors their progress at every stage of work. It is only on the basis of expert opinions, of course paid, that it pays for subsequent tranches of the loan. Any default on our part will result in the suspension of payments, and therefore further construction. Then what? Just remember the unfinished, non-plastered houses that stand abandoned and wait for the resumption of construction works, sometimes even for years. This is the effect of underestimating investments and this is what we should be most afraid of when considering a home loan.
Home loan – what documents will we need?
As we have already mentioned, home loan service is divided into two stages. In the first one it takes the form of a construction loan, in the second it is more like a mortgage. For everything to run correctly, the bank will require us to meet formal requirements. Borrowers are most often expected to submit:
- identity documents,
- sources of income,
- notarial deed which confirms that we are the owners of the plot,
- excerpt from the land and mortgage register,
- letters on building and land development conditions,
- sealed construction permit,
- design of the construction site itself, its log with the signature of the construction manager,
- cost estimate and valuation by an appraiser or a bank employee regarding the cost of the loan.
Home loan – step by step
If we were not afraid of the prospect of enormity of formalities, let’s see what route we need to follow to reach the goal of building a house. It would be good if we started the whole adventure with the purchase of land – and this is best for our own money, because then the whole investment will be counted as own contribution towards the construction of the house. There are few banks that allow you to buy land and finance the construction of a house in one go. In this narrow group, only those lenders will approve such a solution and we will present them with appropriate savings. In addition to the income statement and our financial situation, it will be for them another security and a kind of guarantee that we will manage such an undertaking.
When we have a plot and documents that confirm that we are the owners, we can apply for a home loan. As we wrote, the loan tranche will be paid out as the construction works progress. Installments can take on different amounts: either their full amounts or, initially, interest, and then the remaining amounts. It all depends on the conditions offered to us by the bank with which we signed the contract.
Check the offers of various banks
Since we are in this topic, we signal that the most sensible move will be to submit an application to several banks. First of all, it will give us a full picture of the situation and slowly consciously choose the best offer for us. Secondly, if the institution we initially decided to reject our request for money because we do not meet its requirements, we can direct our steps to another, non-binding bar so high. In addition to creditworthiness, home loans differ in interest rates, commissions. Some of them also require customers to have material security or to buy insurance. T
Home loan – calculator
If you do not want to use the advice of a financial advisor who would also help you carry out the loan application throughout the process, we can take care of the formalities ourselves. Already calculating (using calculators, available on the websites of banks) the final costs of such a loan for a house at the assumed time, will give us knowledge whether we can afford such a solution at all. At the same time, we will check whether a mortgage is not a better idea, or whether we have creditworthiness accepted by banks.
Such a calculator works in exactly the same way as calculators on the websites of loan companies or banks. We provide the amount of the loan that interests us and the preferred repayment period, and the tool, taking into account the interest rate proposed by the lender, gives us information on how high the monthly installment will be and what the total cost of the liability will be. We should remember that the calculator does not take into account our earnings, the number of people in the household and other factors that will be very important for the bank, because only thanks to them it will be possible to generate a precise cost calculation.
Termination of the loan agreement
All those who have a problem not with creditworthiness, but with a decision should definitely think about signing such a loan agreement. Home construction loans are governed by different laws than consumer loans, so the 14-day notice period does not apply if the customer changes his mind. The termination procedure will therefore be very expensive and complicated – at least to the same extent as the home loan itself.
Is it worth taking the risk then? Is it better to focus on your mortgage? The decision should be made not only on the wealth of our portfolio, but also on a stable life situation. If we have a permanent job and unchanged amounts of monthly fees, there is a good chance that each stage of the loan for building a house will go without problems. Otherwise, when such a financial product is the only solution, let’s try to secure the loan, e.g. in the form of another property or a car.