Construction Loan FAQ: Basics You Should Know

While some may be content living in a premade home, others are looking for something a little more luxurious. Even those who simply have a very clear idea of what they want in a home will prefer something custom-built.

If you’re a soon-to-be homeowner contemplating a custom-built home, you will need one valuable resource to bring your dream to life: money. What happens if you don’t have the money to build a custom home? Well, there are two: purchase a premade one or opt for a construction loans.

It’s easy to assume that construction loans are bad because they’re a form of debt. However, they can be a wonderful way to get started on your dream home. Before you file for one, though, it’s vital to thoroughly educate yourself on them to ensure you’re a candidate for this type of loan.

Don’t let the complexity surrounding financial matters dissuade you from seeking loans. If you’re new to the subject, here are a few questions you may be asking as well as their answers:

1. What are construction loans?

Construction loans are, simply put, loans created for those who want to build their homes. They’re often thought to be the same as home loans, but the two are actually quite different. A home loan is used to purchase a fully constructed house, while a construction loan is used for, well, houses in construction.

Construction loans work by slowly covering the incurring expenses like the home is being built. For this reason, when you get such a loan, you will not receive an estimate. Instead, you will get different amounts progressively. At the same time, you will still need to cover the initial deposit for the materials to start building the home. This is typically 5 percent of the estimated building cost.

2. What documents do I need for a construction loan?

There are specific documents you need to have to ensure that you get a construction loan. The documents include your building contract and building plan, as well as the quotation given by the builder. Only with those documents will you be able to qualify for a construction loan.

3. How do the phases of construction loan work?

Once you have gotten your construction loan approved, you will be getting a sum of money progressively. Here is a general overview of what happens:

  • STAGE 1: You will receive an amount of money to cover the building on the base of your home, which typically makes up around 10 percent of the total amount. This includes the leveling off the ground, building the foundations, and installing other infrastructure such as plumbing.
  • STAGE 2: You will get money to cover the cost of building your home’s frames, ranging up to 15 percent of the amount. Here, the roofing, windows, trusses, and the like will be built.
  • STAGE 3: A large chunk of the amount, around 35 percent, is used to construct the components keeping your home safe from the elements. This includes doors, walls, and insulation.
  • STAGE 4: The fixtures will be added, taking up approximately 20 per cent of your contracted amount. The fixtures to be installed can range from tiles, shelves, cabinets, and other indoor fixtures.
  • STAGE 5: During this stage, the finishing touches are carried out, taking up the rest of the amount you have agreed on. Here, activities like a painting of walls, polishing of floors, and other similar things are done. When construction complete, inspection will occur so the builders can make any modifications or additions if necessary.


Now that we’ve addressed some basic FAQs, we hope you now know more about construction loans. At this point, you’ll have to consider whether it’s a fit for your individual circumstances. Remember that construction loans are not all alike and you shouldn’t just be opting for the first option you run into. Rather, take the time to look at as many options as possible. That way, you will have a better chance of finding the best loan possible that will not only help you achieve your dream house but cost the least in the process as well.

Construction loans are our specialty, so if you need a hand, we’re the people to call. Take a look at our services in Perth, WA, or reach out for an expert consultation!