A mortgage isn’t always required to purchase a first home . Those who can afford it may decide to build their own property from scratch . The advantages are numerous: you can tailor the home to your needs and, in some cases, optimize the overall cost. For this very reason, many banks offer products dedicated to those who need the liquidity to build their own home.
These are very special mortgages because they’re issued on something that doesn’t yet exist. This is why home construction mortgages have slightly different characteristics than regular loans. Let’s try to understand them a little more in this guide.
How a home construction loan works
First, it’s important to understand a fundamental concept: this type of mortgage is granted by the bank on the basis of a property that doesn’t yet exist. Therefore, disbursement of a home construction loan is conditional on the submission of a specific set of documents:
- building permit : it is issued by the relevant municipal officials (or by the mayor in small towns) and effectively authorizes the construction of a property where none exists;
- construction project : is a project created by a registered engineer or architect, which is submitted to the municipality to receive authorization (building permit);
- Authorization to begin work : the written authorization certifying the possibility of starting the financing work.
These three documents are absolutely essential for the lender to approve the application. It should also be noted that the capital is usually disbursed in part as the work progresses. This means that, as the work progresses, the builder will issue an invoice and the bank will disburse portions of the approved loan.
First home construction loan requirements
As we’ve seen, the disbursement of these loans is conditional on the submission of documents authorizing the applicant to construct the property for which the mortgage is requested. Let’s now look at the necessary financial requirements:
- Income : Obviously, the mortgage applicant must have sufficient income to cover the monthly payment. Generally, the rule of thumb is to keep the monthly payment to income ratio below 30% (i.e., with an income of €2,000, the bank is unlikely to grant a mortgage with a payment exceeding €650).
- Asset guarantees : Sometimes the bank may require other guarantees. One of these could be assets, such as another property owned;
- Guarantor : The classic example of an additional guarantee is that of the guarantor. In some cases, the bank may require the signature of a second person to act as guarantor to further protect the income institution;
Another aspect to consider when considering home construction loans is the possibility of protests or bad credit reports. First, it’s important to note that while banks, in some cases, provide loans to protested and bad payers , when it comes to home loans, things are completely different. In this case, it’s much more difficult to obtain financing if there’s a protest pending.