A Simple Guide to Financing a Kit Home

A Simple Guide to Financing a Kit Home
If you’re thinking of building a kit home, it’s important to consider your financing options. You need to ensure that you have the money to pay for the kit home and to complete the construction required for the project. There are loans available for owner-builders or those using a licensed builder to construct their home.

Here’s a guide to help you choose the right lender and loan for financing your kit home:

Banking

If you’re an owner-builder, it’s best to get a loan from a small bank, like Service One Alliance Bank. They understand the needs of owner-builders, so talk to one of their financial providers to help you find the finance option which is best for you. Essentially, you’ll have to pay deposits on your purchases and then pay the rest when you’ve received your materials. Small banks offer flexible funding solutions to suit your needs and give you access to money to pay for your suppliers and trades throughout the project.

Unsecured loans

Most banks offer unsecured loans, which you can use to purchase your kit home. It’s the most popular financing option for owner-builders. You don’t have to put anything up as collateral for the loan, such as a home, car or investment. So it’s good for those who don’t have any collateral to pledge. Unsecured loans also have low fees because property appraisal isn’t required.

However, because you don’t need collateral for unsecured loans, banks are more selective when it comes to approving a loan. Your income and credit history will determine whether you qualify for a loan that’s big enough to pay for your kit home. Furthermore, interest rates for unsecured loans are usually higher than secured loans.

There are two types of unsecured loans for kit homes:

  • Instalment loan – The bank will provide you with a lump sum of money that you’ll have to pay back in a set number of equal payments, consisting of principal and interest. Once you’ve paid back the money, the loan is finished and then closed.
  • Line of credit – The bank will make a set amount of money available for you to access. You can borrow as much as you want up to the credit limit. You’ll then have to repay the accrued interest and a percentage of the principal amount owed. After this, money will become available again for you to borrow. Line-of-credit loans can last for a set number of years or stay open until you finish paying it off and then close it.

Owner-builder loans

Those who want to build their kit home without using a licensed builder can opt for an owner-builder loan. But first, you need to submit your building plans to your local council and receive building approval (e.g. Development Application and Construction Certificate). Then apply to your local government authority for an owner-builder license.

Pre-approval

The next thing you should do is seek pre-approval before getting an owner-builder loan. The reason for this is that lenders know building a kit home is a complex process for first-time owner-builders and there’s a chance of cost overruns due to inexperience. Therefore, most lenders don’t lend to owner-builder with a high loan-to-value ratio (LVR), which is a percentage of the purchase price you can borrow.

Getting pre-approval first means that you’ll have a better idea of the maximum loan amount and LVR you’ll be able to borrow. It will also help you determine whether getting an owner-builder loan is better for you or if you should just hire a licensed builder to construct your kit home where you can get a loan with a higher LVR.

Maximum LVR amount and cost estimate

There are two lenders in Australia that will lend a maximum LVR of 80% for a full-doc owner-builder loan. Other lenders offer an LVR of 50-70%. To get a high LVR on an owner-builder loan, you need to create an owner-builder cost estimate prior to construction, which includes the trades required for the job and their costs. A bank valuer or quantity surveyor will then confirm if your cost estimate is adequate and realistic.

Loan contingency

There are also provisions put in place by lenders to safeguard against cost overruns on an owner-builder loan. High-LVR lenders factor in loan contingency, where a part of the funds is kept aside from the total building price in order to cover unexpected expenses. Depending on which lender you choose, the contingency can be anywhere between 10-20% of the total construction cost.

Funding process

After the bank valuer or quantity surveyor has approved and verified your cost estimate, the lender will issue a commencement letter. When you start building your kit home on an owner-builder loan with 80% LVR, you’ll have to contribute 20% of your own funds to the early stages of the construction process. The bank will then provide the remaining 80% to complete the project.

Loan cost

Owner-builder loans with a high LVR usually cost the same as other construction loans, although there are some lenders who offer them at a more expensive price. If you’re thinking of applying for an owner-builder loan, talk to a mortgage broker first. They can help you find a lender who offers a cheap and flexible owner-builder loan to suit your needs.

Borrowing amount

The following looks at how much people can borrow, which is the percentage of the cost of the land and construction:

  • Licensed builders 95%
  • First home buyers 90%
  • Investors 90%
  • Low-docs 80%
  • Owner-builders 75-80%

Conservative banks and progress payments

People buying a kit home find that most banks ask them to pay for their kit home upfront using their own money. Major banks take a conservative approach to kit homes because if they lend money to pay for the kit home upfront and then problems occur during construction, they’ll only be left with the land as security, which could be worth less than the amount of the loan.

Here are some things to keep in mind:

  • In most cases, you’ll need to pay for your kit home in full before it can be shipped to you from the manufacturer.
  • If you’re going to use a licensed builder to construct your kit home, then a bank may offer you a construction loan.
  • If you’re an owner-builder, the amount you can borrow will be restricted – you may be offered 75% of the cost of the land and construction.
  • You should have enough money to purchase your kit home upfront even if you’re using a licensed builder.

Some kit home manufacturers sell kits in sections to match the banks schedule for progress payments.

Releasing funds

Your bank will release funds for financing your kit home under the following circumstances:

  • If you have enough money or land equity to pay for your kit home upfront and are using a licensed builder. The bank will release funds to your licensed builder in progressive payments. However, if you don’t have enough land equity, the bank will delay payment until the kit adds value to the land, which is usually when the kit is already finished.
  • If you don’t have enough money to pay for your kit home upfront and are using a licensed builder. The bank will release funds if you can pay your kit home supplier in stages or pay for the kit home when it’s completed, or if your licensed builder pays for the kit home and includes the cost in their progress payments.
  • If you’re not using a licensed builder. You can get an owner-builder loan if you have land/home equity, savings, or other collateral from a guarantor.

Other tips for financing your kit home

  • Have enough money for the construction so that your bank can approve a loan increase for you.
  • Stick to your plans so that you can avoid having your application reassessed by the banks. If you don’t have a final budget or council-approved plans, then apply for pre-approval before applying for formal approval.
  • Keep things simple when applying for a loan from a major bank. Most of them can’t work with situations outside their lending guidelines, so you can either make changes to your building process or comply with their procedures. Or, you can apply with a small bank that can assist you.

Speak to a mortgage broker for expert advice. They can work out if you qualify for a loan and then help you apply for a loan with a bank. They can also help you get your loan application approved with a competitive interest rate. Then you can start building your kit home right away!