Browse Forums Home Finance 1 Oct 31, 2014 6:24 pm O.P. Hi Can anyone provide some advice on providing a construction loan contract to the bank? Scenario - A loan over the land is 175k (it's worth 400 so we have equity) - We now plan to build a new home on it and ideally have a mortgage of 580k maximum. - We have 50k spare in an account and will use it towards the loan/house as needed. - The bank says to avoid paying lender’s mortgage insurance they must deem our final product to be worth at least 725k. They don’t expect an issue with this. We are now having our plans quoted. The builder, who is not a large project home builder and has a reputable reputation has recommended leaving some enhancements out of the contract with the bank (such as caeserstone benchtops, electrical upgrades etc). They have even said banks will sometimes accept the contract without floor coverings included. They have said this may ease gaining finance and the rest can then be done as variations. Our concerns is that if there are particular expenses we already KNOW we want included, we would prefer them to be explicit in the contract so we have a clear idea of the final costs and minimise variations. I suspect the builder is worried about finance falling over in terms of spend/final value and doesn’t want to have to redo the contract. Aren’t we better off getting as much as we can in the contract, and if there’s an issue with the bank then varying it? What if any advantage is there to us to leave things *out* of the contract? Doesn’t this mean we will then need to fund variations from our own pocket rather than the mortgage? Obviously we accept some variations will occur but are trying to minimise them. Can someone more experienced in this area please help? Is it overcapitalisation? Thank you! Leksie Re: Construction loan advice 3Nov 04, 2014 8:35 pm Hey Leksie, From what you say above, it seems that your construction costs will be just over $405K. Going by "normal" valuation of land value + construction, the valuation should come back at $805K all things being perfect, which is way higher than the $725K needed to avoid LMI. However if things are included which aren't deemed to add value, then the valuation will come back lower (i.e. those gold plated taps and heated floor tiles that you desperately had to have), and maybe that's what your builder is afraid of. Now if they excluded things from the contract, and you wanted to do them as variations afterwards, then it would need to be out of your own pocket, as banks won't finance them as you have been approved for a certain amount for things stipulated in the contract. Either that or you would have to wait until construction finishes, and get a new valuation done and maybe pull some equity out that way for it. What you should do is get an upfront valuation done before applying for a loan. That way you know where you stand. Cheers Tom Re: Construction loan advice 4Nov 04, 2014 9:41 pm It's also up to you in terms of the value of your construction loan. You can get approval for a higher amount than the build contract price with the builder if you are thinking you will need access to funds to do finishing etc. always a good idea to stay below that 80% to avoid the insurance. If you aren't over capitalising with too many add ons and can see similar priced homes in your area you should be fine. Re: Construction loan advice 5Nov 10, 2014 3:55 am Thanks for the replies it was as I thought. Tom she definitely said the valuation of the final product would need to be worth 725 as the lVr. Could this be because we already have conservatively 200k equity in the value of the land? The build price is higher as its a custom home with a smaller/high quality builder as a KDR in an established area. We needed it to get the right plan for the block. It's also BAL 12.5 not bad but extra costs there. I guess we could take out air con and some of the kitchen upgrades but the kitchen is not significant. We will take the quote as is to the bank first see what they say though I think. Re: Construction loan advice 6Nov 10, 2014 6:13 pm Hi Leksie Assuming the bank will have a problem and amending the building contract is not the best way t go ahead. You should do an up front valuation of the property with the proposed building contract in place with all fixtures and fittings as you want them and have the valuation assessed, If their are any problems you can amend the contract before signing it. Re: Construction loan advice 7Nov 10, 2014 6:40 pm Can I add its really hard to convince a valuer to increase their valuations because you've upgraded bench tops or added more power points - the advice above is great, as long as its not ridiculous go in with everything in the tender for the best chance at the best valuation and you can work backwards from there. The valuer works on a cross check per square meter value so that also lets you know if you're builder is on track I always recommend finding out if there is something that builder always does "post contract" or as a "post contract variation" and including a provisional allowance for this as well (again, providing it's not ridiculous) for the same reason. You really want to avoid trying to get a higher valuation down the track if you need it!. Best of luck - let us know how you go! Rebecca Jarrett-Dalton Property crazy expert mortgage broker, love building new homes! Two Red Shoes mortgage broker http://www.tworedshoes.com.au/building Re: Construction loan advice 8Nov 10, 2014 10:38 pm Leksie5000 Thanks for the replies it was as I thought. Tom she definitely said the valuation of the final product would need to be worth 725 as the lVr. Could this be because we already have conservatively 200k equity in the value of the land? The build price is higher as its a custom home with a smaller/high quality builder as a KDR in an established area. We needed it to get the right plan for the block. It's also BAL 12.5 not bad but extra costs there. I guess we could take out air con and some of the kitchen upgrades but the kitchen is not significant. We will take the quote as is to the bank first see what they say though I think. The bank said the total value needs to be at least $725K because 80% of that is $580K and that is what you expect your loan to be. Even if the construction component comes back lower than actual cost, if there is equity in the land to offset this, it won't matter. Any higher than $725K and it strengthens your application further. Cheers Tom The biggest challenge will be if you take out a loan and then run out of money - you'll have an incomplete security and lenders do not like this so you can get stuck.… 2 19096 Hi, you've probably already resolved this, however, Commbank will probably pay the funds to you after you send evidence the work is done regardless the change in the quotes. 1 35312 How much are you ahead in payments compared to where the build is at? Have you fully drawn down the loan? 5 11915 |