The process of owning a home begins by picking out a satisfying place then obtaining the land. After all that how do you finance the construction of your dream home?
Being a landowner and paying rent feels like a burden, after saving up and buying land most people become reluctant and leave the plots for a while before saving up again for construction, this is true for most people, especially the lower middle class.
Constructing a home in bits is usually more costly, for some people this process can take years before moving to your own home.
Banks and other financial institutions have identified the gap and strategized on capitalizing on it. They offer construction loans which are financial products aiming at those with land and are looking forward to constructing residential units on them.
What is a construction loan?
It is also called a self-build loan, it is used to finance the building of a home and can also cover the costs of a construction project before obtaining stable funding.
It is an answer to those who already own land and are eyeing on building their dream homes. This loan product ensures you do not wait for long to save up for building your desired dream home.
Being a landowner, a construction loan can enable one to expedite from being a tenant to a homeowner easily. The loan is disbursed to professionals who are selected to manage the project. The payments are made in instalments for different stages of construction.
Most financial institutions consider construction loans riskier than mortgages since they offer higher interest rates
- Construction loans are of three types:
- Top up loans
- Rehabilitation or restoration, and
- Building new homes
Requirements for Construction Loans
There are some requirements looked at before advancing the loan. It can be frustrating for first-timers to secure the funding for those within the limited credit history
The credit history of a borrower shows how responsible he or she is on debt repayment. All this information is shown on a credit report that can be found on several sources including the Credit Reference Bureau.
In Kenya, most construction financiers will require about a 20% down payment for the loan. Other requirements will include:
- An approved building plan for the proposed house
- Contractors agreement
- The bill of Quantities
- The profiles of all the professionals involved (the Project Manager, and or Quantity Surveyor, Contractors, and Architect)
- Professional indemnities of the Engineer and the Architect
- Copy of title to the property
- Identification details ID or passport
- 3 months pay slip
- Bank statements for the last 6 months
- Getting started with a construction loan
So, now that you know all about construction loans in Kenya, how do you get started?
Here are some steps you might follow when sourcing for funds to build your dream home:
Start by identifying the financier that offers the best rates and has the most favourable terms. Shop around, talk to a financial advisor to avoid getting into repayment problems due to the complicated nature of construction loans.
You need to provide adequate information to get the lending institution to pre-approve your application. Ensure you do not hide anything, to show your actual ability to pay and avoid getting into problems.
Make sure you understand your loan rates. We advise that you go for a floating rate, also, ask your loan officer if the loan will be the same once the construction is over and the loan is converted to a mortgage.
Given that the lender needs to approve the project managers, we advise that you go for a reputable contractor to increase your chances of getting the funding. Have a written agreement outlining the duties and responsibilities of each party, and the actual amount to be paid through the construction stages.
Ask the lender to recommend those they have worked with before to fasten the process.
Have an architect design a house that fits the amount provided by the lender.
Construction financiers in Kenya
In Kenya, several banks and other financial institutions offer building loans. To get you started, here are some of the lenders you might want to check out:
Housing Finance Group
Kenya commercial bank
Talk to us to advise you on how to go about construction loans and what you need to look out for.