There are various types of mortgage that banks are willing to take out, determined on the basis of the use that the contractor (i.e. the one who ultimately benefits from the loan ) will make of the monetary loan provided by the bank. In this guide, we will deal with the building loan, but before describing the details regarding the characteristics and methods of applying for this loan, it is necessary to shed light on the more general concept of a mortgage.
How the generic loan agreement works
Essentially the mortgage is a type of contract that regulates the loan that a bank (which is legally a subject defined as a lender) grants to another person (i.e. the borrower). From the moment the borrower receives the loan (all or a part of him), the obligation to repay the amount arises for him. In the vast majority of cases, the loan is for consideration: that is to say that the money returned is recalculated taking into account the interest, therefore the final cost is higher than the sum received. All the details regarding the amount of interest and the methods of debt settlement are, of course, explicitly defined in the contract. In this way, the borrower can immediately know the final amount net of inflation.
Since this is a loan, the bank obviously bears the risk of no longer having the amount of money returned and therefore asks for guarantees, often through the intercession of a third party called, precisely, guarantor. It will therefore be necessary to demonstrate that you have fixed income (therefore for example an employment contract) that allows you to repay the loan over time, or to be in possession of real estate or financial assets. The different banks operate in different ways; in any case, the customer has certain flexibility in choosing the period of time in which the loan will be repaid and therefore, consequently, the number and amount of the installments. Going into the specifics, let’s now understand how the building loan works.
What is the building loan and how does it work
A building loan is a loan granted to those who need liquidity to build a property or renovate an existing building. As can therefore be seen from the definition, this type of mortgage is aimed at both those who intend to renovate their homes and those who want to build a new home (in this specific case we are talking about a mortgage for first home construction ) and private individuals can apply for it. , as well as businesses.
There are significant differences between a building loan and a mortgage intended for those who want to buy a house. As for the building loan, the sum of money corresponding to the loan is not disbursed in a single solution, as in the case of the home loan, but gradually, i.e. the loan is deferred in installments according to the progress of the work. In fact, the bank monitors the progress of the works to ensure their regularity and, generally, the first part of the loan amount is allocated at the end of the construction of the foundations. The amount that, in total, it cannot exceed 80% of the expected cost of building or renovating the house, which in any case usually amounts to 60-70%. This method of disbursement of the building loan is therefore designed to protect the bank from the eventuality of future insolvency of the debtor.
In the event that the house is already built and ready to be inhabited, the property itself constitutes a guarantee if the borrower is unable to repay the amount obtained on the loan. With 80% of the value, the bank could recover a large part of the debt by proceeding with the sale of the property through an auction and protecting its capital from any default by the borrower. In the case of the building loan, construction or renovation works involve a change in the actual value of the property. The granting of a building loan, therefore, hides on paper many more risks for the financial institution: on the one hand, the construction does not guarantee the recovery of the loaned value (especially in the event of suspension of the construction), on the other hand, the restructuring could have negative impacts on the possible sale of the house by depreciating its market value.
To protect themselves from this risk, the banks, therefore, proceed with a disbursement of the loan for the progress of works (SAL): the capital will be disbursed from time to time only following a technical appraisal capable of verifying the conformity of the works carried out with the works and on schedule.
Guarantees for a building loan
But in addition to the SAL disbursement of the loan, how can a bank protect itself from any defaults? In the case of a mortgage to build a house, it is not possible to register a mortgage on the property to be built, as its non-existence itself makes it impossible to take out any mortgage. At the same time, the land alone does not constitute property for the bank for which it is advisable to grant a loan for the purchase of land and therefore capable of covering the amount of the sums disbursed.
To obtain a building loan for the construction or renovation of a property it is necessary to present suitable guarantees: in the case of a loan to build a new house, a mortgage will be registered on the land on which the property will be built; in the case of restructuring, on the other hand, the mortgage will be registered on the initial value of the property. The mortgage is therefore registered in the deed of granting the loan which, according to the law, must take place by public deed in the presence of a notary and will then be entered in the public registers.
A further guarantee is the presentation of the last paycheck or suitable tax documentation certifying the debtor’s source of income and the possibility of returning the requested sum. In both cases, the bank will assess the creditworthiness and structure the repayment plan according to the needs of the debtor. The clauses for the disbursement of the building loan are contained in the mortgage deed.
Construction loan times and costs
The repayment time of a building loan is contained in the loan deed signed in the presence of the notary and can be very variable: indicatively, a building loan has a duration ranging from a minimum of eighteen months to a maximum of thirty ‘ years. The lower the amount requested, the greater the chances of having a short or medium-term mortgage (5-10 years)
As regards the costs of building loans, it should be remembered that other secondary expenses must be added to the cost of the loan, which includes preliminary investigation costs, taxes and duties to be paid to the State, notary fees, and those due to technical appraisals. On the other hand, the rates covered by the loan include those relating to the design of the works, the contract, and the safety charges (but not only: to know all the costs of the building loan in detail, it is necessary to refer directly to the lending bank). Regarding the guarantees, the bank takes out a mortgage depending on the project to be carried out.
Building loan for new construction
In the case of new buildings, the mortgage is placed on the land on which it will be built, while in the case of a renovation the building subject to the works is mortgaged. Another aspect that must be taken into account is that in most cases the bank sets a maximum limit on the duration of the works, which generally corresponds to 36 months. Of course, it is necessary to have a series of documents to be able to take out a building loan (even more so for a green building loan that is part of the green mortgages). Also in this case there may be some differences between the different banks, in relation to some specific documents required. In general, however, it is always necessary to provide the documentation drawn up by the notary, the documentation relating to the mortgage (so that it is provided as a guarantee), and everything needed to prove an income. Furthermore, in the case of new buildings, the cadastral map of the land and the documents proving the purchase must be provided. Instead, for a renovation building loan, the renovation project and the related financial planning must be presented.