Construction Loans
Trying to build a new home from saved money can be really difficult. This is why the loan market offers the possibility of contracting a construction loan, within the UK known also as a “story loan”. It is called a story loan, because the lender will want to see your actual plans for building a home, so that he knows what is about to finance (risk assessing). In order to get eligible for a Construction loan, just like in the case of any other type of financing available, you must meet certain criteria:
  • You need to make proof of a stable source of income (self employed people will meet difficulties in obtaining a construction loan, unless they can make proof of income for the last 3 years)
  • Bank statements for the last 6 or 12 months, depending
  • Plus, you will most definitely need to show commitment and responsibility. Once you contract a loan that has to be paid back in full, at some moment in time.
There are two major types of construction loans available: the construction only and the construction-to permanent type of loan. The construction-to-permanent type of loan supposes that for the time your home is actually being built, you will pay only the interest to the lender. You will start paying the principal from the point the home is finished. Actually, starting from that moment the whole loan is being changed to a mortgage (working on the same principles).

Also, with the contracting of a construction-to permanent type of loan, the extra fees and charges (such as arrangement fees, title search on the property, etc.) will not be that expensive. If you opt for a construction only type of loan:
  • There are two separate phases of this loan: the payments required during the actual construction of the home, and the payments required after completion
  • During the time the home is being built you will be paying only interest
  • After the completion phase, you need to repay the principal in full
  • You have the alternative to apply for a mortgage after the actual building phase is over. (a good advice is that if you are satisfied with the provisions of the lender whom you have paid the interest to, you should ask for a mortgage from the same lender)
  • Whichever type of construction loan you choose, make sure you have dedicated enough time for a quality research, in order to find the best available option. The loan also has to be affordable, and always well correlated to your present financial status.