The idea of building your own house on your own plot is extremely attractive, but without enough savings it is not always easy to do so. What criteria must the future recipient of such a loan meet and what are the subtleties of this credit that are not known to everyone, says Edvinas Jurevičius, Head of Retail Banking at Luminor Bank.
According to the expert, just as when taking a loan to purchase a house, in order to get a loan for building a house, you must first have your own funds. However, in this case, they should be used for the purchase of the plot and the construction of the so-called “box”.
“You should apply to the bank for a loan after you have built the so-called “box” with your own funds and registered it in the Register Center – the foundations have been installed, the walls have been built, and the roof has been covered. Then, in order to get a loan, the bank should submit a construction permit, a detailed project and estimate, and an assessment of the mortgaged object’s assets”, notes E. Jurevičius.
According to the expert, it is necessary to consider the fact that these documents can cost from several to tens of thousands of euros, and it can take up to a dozen months to receive them.
“The bank will evaluate the submitted documents and the complete construction project: how much funds the client has already invested and whether the credit funds will be sufficient to complete the construction. In order to get a bigger credit, other available real estate can also be mortgaged,” says E. Jurevičius.
Investments do not equal asset value
According to E. Jurevičius, the funds for construction are disbursed in stages – every time after the client invests the disbursed part of the credit, the property is assessed and the other part of the loan for construction is disbursed from the difference between the increased value of the property and the already disbursed credit amount, taking into account the expected maximum amount of financing.
“It is important to know that the funds invested in construction do not always clearly reflect the value of the property. For example, the customer may pay more for materials and labor to install the foundation than the structure—in this case, the foundation—will be valued at the property’s appraisal. Also, for example, the installation of recuperation usually costs several thousand euros, but such investments are not reflected in the property valuation”, observes the expert.
E. Jurevičius adds that the value of the real estate under construction also depends on the area where the object is being built, since property evaluations are carried out and the value is determined based on the purchase and sale transactions of similar objects there. For this reason, in areas with a low activity market, where the unemployment rate is higher than the national average and the population is decreasing, the value of the property can be significantly lower than the actual funds invested in construction.
“Therefore, the greater part of the client’s own funds is invested in construction at the very beginning, the faster the completion of construction with credit funds,” says the Luminor Bank expert.
It is important to estimate your income
As with all other borrowers, it is important for borrowers to critically assess their options: is the monthly income sufficient to cover the loan payment, is the income stable, or are there any circumstances that could reduce financial resources in the near future, for example, possibly planned jobs change, family growth, is diagnosed with a serious illness that can reduce working capacity, etc.
“Sustainability, continuity, credit history, etc. of the client’s income are important to the bank. – all these circumstances are evaluated before granting the loan, as in the case of other credits. What is extremely important for the client to assess in advance is whether there is a risk that he will no longer be able to pay the loan due to fluctuating income. This is particularly relevant for residents with variable incomes, such as self-employed people,” he notes.
Normally, financial obligations – housing loan, loan for building a house or other existing loans – should not exceed 40%. individual or family income.
“In addition to the sustainability of income, the nature of the borrower’s work, specialization, potential income and its stability are also evaluated. When the income fluctuates, it is recommended to allocate a smaller portion of the income to the home loan, then the risk that you will not be able to pay the installment during financially difficult times will also decrease,” notes E. Jurevičius.
About Luminor:
Luminor is the leading independent bank in the Baltic States and the third largest provider of financial services in the region. We serve the financial needs of individuals, families and businesses. Like our home markets – Estonia, Latvia and Lithuania – we are young, dynamic and forward-looking.
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