How building loans work

Do you dream of building your own house? Okay, to build the house all by yourself maybe is to get water over your head. But to have to decide how it should look and what a feeling it must be filled in when you walk through the door, it’s not impossible. However, one condition is that you know how to finance the project. If you are going to expand, do a major renovation or build a brand new house, an alternative might be to take out a building loan. Here we go through how it actually works when you are going to realize your house dreams with the help of building loans.


What is a building loan ?

What is a building loan ?

A building loan does not really work like a regular loan, but is a type of credit used to pay for the construction. A more accurate word is therefore building credit, and the banks use both terms when describing the service. The financing solution means that the borrower receives credit for being able to pay the bills relating to the construction. When the building is completed, the used credit is converted to a mortgage. The solution is used when you are not sure what the project will cost in the end and therefore do not want to take out a loan on a fixed amount.


Careful preparation

Careful preparation

When you take out a building loan, the bank lends money based on the value the house is expected to get. This poses a great risk to the bank, and therefore it is in their interest that the construction proceeds as planned. Therefore, in order for the loan to be granted, they require detailed information about the project before you get started. You must therefore know what you want and who you want to work with before submitting your application.

A good start can be to contact different contractors and construction companies and compare their offers. Ask companies for references so you can find out what previous customers have for their experiences. It means a little extra work, but it’s worth it when you start such a large and comprehensive project. After all, this is your house! But do not sign any contracts until you have met the bank and obtained their approval. Also, consider comparing loan offers from different banks to get the lowest interest rates and the best terms.


Your application

building loan

When applying for a building loan, the bank will want as much information as possible about the planned building. This is to ensure that the construction plan holds and that the calculations are accurate.

Your application should therefore contain the following:

  • Drawings of the construction
  • The total cost of the project
  • Possible contracts
  • Information on production costs

When all documents have been approved, a preliminary evaluation of the building is done, then the bank decides how much they want to lend to you. You are not allowed to borrow the entire cost, but you must be responsible for a cash contribution of about 20%. If everything looks fine, you get a loan promise and a loan agreement is signed. Then you get access to the building loan.


This is how the building loan is used

This is how the building loan is used

The building loan may only be used to pay the costs associated with the construction. Therefore, remember to save all receipts for different expenses and purchases in a folder when these are to be reviewed by the bank. During the construction process you will have close contact as they want to make sure that the value of the house increases as it should.


What happens next?

building loans

When the construction is complete, a final inspection must be carried out. If the work is approved, a final notice that the building has been completed must be sent to the municipality. It will also be sent to the bank, which will carry out a final evaluation of the building. Subsequently, the used credit can be converted into a regular mortgage. Be sure to compare loan offers from multiple lenders when you are reposting your building loan. Just because you chose a particular bank for the building loan, you are not bound to use it in the future. Other lenders may have significantly better deals.