For many people, building your own home is a dream come true. This is not surprising, because everyone would like to have their own four angles that look exactly as we want. Of course, not everyone has savings, the amount of which would allow to finance such an investment. Therefore, we are looking for the best loan offers that will allow us to deal with both the construction and debt repayment relatively quickly. At the beginning of this road, it is worth finding out what is the difference between a home construction loan and a mortgage.
Loan loan uneven
At first, very many borrowers think that a home loan is exactly the same as a mortgage. However, this is not true, which can be seen very quickly when comparing the offers of these two banking products. In fact, by going to the first better bank, we will be able to quickly receive information as to what conditions for obtaining particular forms of financing the construction of a house can be offered to us. Regardless of what type of loan we ultimately consider more profitable, we should prepare ourselves properly before submitting the application.
Home construction loan – a plot first!
In the case of a loan for the construction of a house, we must be prepared for the fact that the bank will expect us to own a construction plot. This is the first obstacle that we must overcome in order to apply for such financing at all. Therefore, before we start to complete the application, we should have behind us the process of finding and buying a plot that meets our expectations. For many people, this is an insurmountable requirement because they do not have the means to pay for such an investment. It is worth remembering, however, that this type of property, which will become our property, is also our own contribution. Therefore, the bank will be more favorable to grant us a loan for the amount requested.
Home construction loan – how does it work?
There is no denying that getting a home loan will cost you a lot more effort than if you were a mortgage. The requirement to have a construction plot mentioned above is the best example. In most cases, banks also expect their potential borrowers to provide quite a large amount of various documentation. It is this that is the basis for granting us a loan, which is why we must demonstrate considerable scrupulousness during its collection. We cannot afford any shortcomings as they may result in refusal to provide us with financial support.
It is also worth emphasizing that in the case of a loan for building a house, the bank provides us with successive parts of the amount of money allocated to us gradually. Subsequent loan tranches are launched when a specific stage of works is completed. Progress is meticulously checked by inspectors employed by a given bank. Interestingly, however, during the construction process, banks often do not collect full loan installments from us, but only interest on it, which for many people can be a big plus.
However, you should remember that when choosing a bank loan offer and signing a contract, you should read all documents carefully. We must be sure what conditions we agree to and what costs we will ultimately incur. When taking out a loan for the construction of a house, we should also be informed about what documents we will need to account for the various stages of construction. It is also important at what time the bank will give us the next tranches of the loan.
When deciding on this form of financing the construction of our house, we must also be aware of the consequences of any inaccuracies on our part. In a situation where the progress of work is not as planned, or we allocate money from the loan for a different purpose than previously agreed, the payment of subsequent tranches may be suspended. In extreme cases, it also happens that banks terminate the loan agreement with their clients.
Mortgage – when we care about time
If we want to get a loan to finance the construction of a house in the shortest possible time, a mortgage loan may be a better solution. In this way, we save ourselves not only a considerable amount of time, but often also nerves. The most important difference between the discussed forms of financing such an investment is, of course, the requirement of owning a construction plot. In the case of a mortgage, we do not need to acquire any land beforehand to apply and receive a loan.
Of course, just like when applying for a loan for building a house, we must be prepared to provide the bank with a large number of documents. Unfortunately, in the case of loans for such large amounts, all these formalities cannot be avoided. Thanks to the fact that we do not have to worry about searching and finalizing the purchase of the plot, as well as obtaining the necessary building permits, we avoid many difficulties that are often associated with a typical home loan.
A very large group of borrowers are also convinced of a mortgage due to the fact that the amount for which we apply may also include funds for finishing the house. Thanks to this, after construction, we don’t have to apply for another loan.