Building A New Home - Things To Consider

Building your own house can be a wonderful and fun experience – but it can also be a long and expensive process. While most people pay for the cost of home construction via a home loan, getting construction finance can be a little more tricky.

After all, you’re asking a bank or a mortgage lender to give you money for something that doesn’t even exist yet.

Many lenders will have restrictions on construction loans for many reasons, and some may not do them at all. One major issue is that you need to place a lot of trust in the builder. The bank or lender is lending money for something that is to be constructed, with the assumption that it will have a certain value when it is finished.

Here are some must know things when choosing to build over buying:

1. A qualified builder must be involved. A qualified builder is a licensed builder with an established reputation for building quality homes. This means that you may have an especially hard time finding an institution to finance your project if you are intending to act as your own general contractor, or if you are involved in an owner/builder situation.

1. The lender needs detailed specifications. This includes floor plans, itemised costs, and full form contracts. These are the documents the lender will use to determine the value of the end home.

1. The home value must be valued by a licensed valuer. Although it can seem difficult to appraise something that doesn’t exist, the lender must have a valuer consider the contracts, plans and specs of the house, as well as the value of the land that the home is being built on. It's very important to be aware of this as the end value is used to compared to other similar houses with similar locations, similar features, and similar size. If your home includes a lot of “extras” such as ducted air con, stone bench top, expensive tiles ect, then these items may not add “value” to the end product and the determined value may come up short – it's important to discuss this with your broker before entering into your building contract.

1. You will need to put down a deposit. Typically in WA it's not a lot, but it's important to know that unlike the deposit for the land, it's non-refundable. Usually an amount between $2,000 and $5,000 is the minimum deposit paid to the builder. It can be counted towards your entire deposit.

1. Be aware of un-included extras. As the new home will be the lender's security, they'll want to make sure it's a full functioning property when completed. So it's important to make sure things such as front yard landscaping, fences, flooring & window treatments are part of the build and land purchase. Some lender may allow you to do these yourself, but if it adversely affects the end value (like not having fences would) the lender may not finance it or seek to show you have the cash to pay for it yourself.

1. Pre-start is not financed. Pre-start is the process in which you select your colour, titles ect for your new home. It is always done after finance is approved and just before settlement. A good builder will include a pre-start allowance in the contract, usually about $5,000 to cover anything that goes over the budget. But remember, if you make significant changes over and above your budgeted pre-start allowance, those changes won't be financed – your builder will know this but they don't always tell you.

1. There's no such thing as a freebie. Builders use all sorts of sales tactics to sell you their home, including free furniture, white goods, air conditioning ect – remember there's nothing free in this world and you will be paying for it somewhere in the contract. This is also important when considering the lender will have a valuation done – if the builder is promoting $20k worth of “free stuff”, that costs is going to be worked into the contract somewhere and may affect the valuation.

1. Settlement & finance dates. All land agents will know that a builder can take several months to complete the contracts and plans for a new build. And that those plans ect will be required as part of your finance. So when you sign a contract to buy your land, make sure the finance clause has sufficient time to allow the builder's process. You won't be able to get your formal finance without the builder contracts, and settling on the land before that will cost you significantly more in stamp duty.

1. Make sure you chat to us first. Building is the most complicated form of mortgage finance. And there can be some scrupulous sales people that just want to get you to sign on the dotted line. Make sure you speak to our brokers first so you have all the information you need before signing up to buy your land and build your new home.