Construction Loans 101

In my previous post, I briefly mentioned that I was unsuccessful in my last attempt to secure a construction loan and alluded to the fact that it was a pretty tumultuous attempt. I think that applying for or getting a loan is one part of adulthood that you always assumed would be stressful but don’t really understand why until you’re faced with it. I guess it makes sense when you realize that if getting a loan was easy then everyone would probably have one for everything.


But what makes applying for a building loan in particular such a stressful process? First of all, a construction loan is different from a regular mortgage for a turnkey property or loan for a vacant lot. The documents needed for those applications are pretty straightforward (your IDs, payslips, job letter, property appraisal). For construction loans, however, everything is more subjective which makes the process more complicated. Here are a few of the additional documents you’ll need:


  1. A quantity surveyor’s report: this will detail any current work done on the property and its current value, as well as an estimate of the costs needed to begin or complete construction and estimated value at completion,

  2. You will need a quote from your contractor of choice and some banks may require you to get an additional two quotes from other contractors to compare figures.


As a Compliance professional myself, I totally understand the need for lenders to get as much information as possible together before handing out loans. They need to make sure that the amount they’re lending is firstly realistic so that you can finish your project and pay them back, and second of all that in case there are any issues with one contractor, you will have enough money funded to pay another to finish the job with another. While it seems straightforward enough, this can be the most stressful part of the process since prices often vary a considerable amount from one contractor to another.


A colleague of mine started her application around the same time as I did and we both ended up in the same position after five months: stuck. On the flip side of things as contractor's daughter, I heard more than enough stories growing up about how waiting for a loan either slowed some jobs down or caused them to go bust entirely when they weren't approved.


It’s common for people to get so frustrated with the application process that they just build out of pocket anyway, like I decided to last year. It’s even more frustrating given the price increases and time restrictions given the pandemic, and some lenders are now holding back on approving construction loans at all. This is not intended to be dismissive of the lending policies when it comes to building loans or to shed banks in a negative light, because the lenders who tried to assist me were very helpful. This is instead an attempted fair warning that in many cases, particularly for younger people just starting out, it may not be feasible or easy as you'd imagine when you first hatch the idea.


One of the main things I wanted to explore throughout this blog series is what I would recommend to other people along the way. So far, here are my thoughts on building and loans given my own circumstances:


  1. You will need A LOT of time to spare, whether you take the loan route or otherwise. Make sure you’re in a comfortable living situation where you’re able to and won’t mind extending your stay if necessary.

  2. If you decide to build out of pocket and don’t have all the money saved upfront, you shouldn’t start until you have at least 5 or 6 months’ worth of construction costs saved up to ensure that the job moves at a good pace.

  3. If you plan on doing this alone for the first time at a young age, don’t. It is so much easier with two incomes and someone else to share the stress with. Also note that this doesn't have to be a romantic partner either; in fact I'd like to encourage more young people to work towards these kinds of investments as business partners.

  4. You will need at least two or three income streams if you plan to build out of pocket. I already lost a huge one in the past few months and had a serious “I’ve hit a brick wall” moment.

  5. You’ll have to give up A LOT of leisure and luxury. Delayed gratification will be your best ‘frenemy’.


Having all or at least the majority of the money upfront is really the ideal situation for all parties involved. I don’t say this to try and scare anyone off from the process or to diminish dreams, but if I had truly taken the worst case scenario into consideration for all of these things from the jump, I wouldn’t have rushed into this process the way I did. However, I’m in too deep and have to keep pushing and constantly stepping out on faith.


I wish that this post could have been a little more optimistic, but the sobering reality is that sometimes this process is just extremely hard and that’s all there is to say until you figure out the best solution for your own circumstances. This is why it’s important to have experienced industry professionals to help guide your decision making. I hope that the honest advice from my journey can help you along the way as you learn from my mistakes.


Disclaimer: I am not a lending professional, so the above advice is solely based on my own experiences.

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