Obtaining financing for building a house is slightly different from a loan to buy a finished property. Other documents are required to obtain a loan, the starting procedure is different, and the method of settling the funds used is important.
First a plot, then a loan
The first condition we must meet to get a home loan is the need for a building permit. It is not enough just to have a selected construction project – the bank will expect a valid building permit or construction notification at the relevant office. The effect of such requirements is the need to separate the two activities, i.e. the purchase of a construction plot and the simultaneous application for a loan to build a house. First, you need to buy a construction plot, get relevant building permits, and only after you have completed these formalities can you apply for a construction loan. Only a few institutions, allow a single loan to combine plot purchase and house construction.
What documents do we need?
When applying for a loan for the construction of a house, appropriate documents must be submitted with the application. In addition to those confirming the amount of income, it must first be proved that the plot on which we want to build a house is our property. Most often for this purpose it is enough to provide a copy of the Land and Mortgage Register, although some banks will require a notarial deed confirming the method of its acquisition. In addition, a building permit must also be presented. If we have purchased a plot of land and a permit has already been issued for the previous owner, then it is necessary to rewrite this permit to the buyer. Only after these formalities can we apply for a loan. In addition, banks also require an extract from the land register and an extract.
The cost estimate is the most important
An important document that we submit together with the loan application is the construction cost estimate. It is on the appropriate bank form that we must specify what we want to build and what costs we plan to incur. It is worth spending the right amount of time to complete this print correctly, because it depends on its content what amount of credit the bank will grant us and how the loan will be launched. It is important to make a reliable estimate of the costs, as the bank will verify how much we plan to spend on carrying out individual stages of construction works. If the costs are too low, then it may turn out that we will not be able to carry out the appropriate stages of work and, as a consequence, the bank will not want to launch further loan tranches. An indispensable condition for releasing the remaining part of the loan is settlement of the previous construction stage.
In an extreme case, if the costs declared in the cost estimate are too low, the bank will refuse to grant us a loan at all or will order a higher amount. Most banks assume the minimum cost of building 1 square meter of building at 2200-2800. This means that if we are building a house with an area of e.g. 150 square meters, then construction costs must be from 330 thousand. up to 420 thousand and such funds from the loan and own contribution the borrower must have.
Settlement of tranches
The loan for house construction is paid out in tranches. The bank will not release another part of the loan if we do not document the use of previous tranches in accordance with the cost estimate. The verification method is very diverse. Some banks require invoices for purchased materials amounting to a minimum of 60 percent of the amount of the launched tranche. Other banks expect photographic documentation that will confirm the completion of construction work. However, most institutions use inspection – a bank employee or an authorized person visits the construction site and checks the progress of construction works. Only after verifying the proper and timely use of funds is the remaining part of the loan released. For this reason, it is important to spend the amount paid as planned. For example, the bank will not accept the purchase of a roof tile or roof truss at an early stage, e.g. when the foundation is being poured. It doesn’t matter if we used the tile promotion and bought it cheaper than if it were in a few months. If the tranche was not intended for the purchase of these materials, the bank will not accept such expenditure.
How much can we build?
Most banks require that the construction of the house be completed in a maximum of two years. This means that we must put the building into operation at this time. It is unacceptable to solve the problem with the loan and then finish the construction for many years. If we finance construction with a bank loan, all construction works must be completed within a maximum of 24 months from the loan being disbursed.