3 Types of Construction Loans in Kenya

Do you own a plot but lack adequate funds to construct it? Then this is the ideal solution for you.  A construction loan is a facility that enables you to borrow money to finance the construction of a home or real estate project. Today, you’ll know the 3 types of construction loans in Kenya and how to get such loans

The following are the 3 basic types of construction loans in Kenya:

  1. Construction-only loans
  2. Construction to permanent loans
  3. Renovation construction loans

Construction loans in Kenya can be costly with relatively high-interest rates. However, some developers have calculatedly leveraged them for successful real estate projects. On the other hand, reports from different banks show that a quiet number of the funded projects usually collapse.

As a result, financial institutions in Kenya apply rigorous qualification requirements for construction loans.

In this article, we’re going to look at the different types of construction loans in Kenya and how to access them.

Types of Construction Loans

There are three types of construction loans in Kenya:

1. Construction-only Loans

Construction-only loan is a type of loan you must pay fully once the building is complete. This will be the best option if you have enough cash. However, you should be sure that the money from selling your current residence home will cover another building.

If you want a mortgage to finance the expense, you must look for a lender and receive approval a second time.

Find Out: 11 Types of Loans in Kenya and How to Qualify

2. Construction to Permanent Loans

This would be the ideal type of loan for you if you have construction and timeframe plans. For this particular loan, the lender pays the builder as the project is underway and as it is fished. Afterward, at closing, the cost is switched to a mortgage.

You can lock interest rates at the closing, which enhances consistent payments.

3. Renovation Construction Loans

If you want a loan to finance a derelict building, then this is the ideal loan for you. The estimated renovation cost of the fixer-upper building is typically included in the mortgage and buying price.

How Can I Get Construction Loan in Kenya?

You can get a construction loan in Kenya by following the right steps stipulated by the lending institutions. These steps are:

  1. First, identify a lender with the best rates and the most favorable terms. Shop around, and consult with financial experts to avoid payback problems caused by complex construction loans.
  2. You will have to give sufficient details to get the lending institution pre-approve your application. Don’t hide anything to demonstrate your true capability to pay back and prevent issues.
  3. Ensure you comprehend the loan rates. It’s advisable to choose a variable rate. Additionally, inquire with the loan officer if the loan will remain the same once construction is completed and the loan is converted to a mortgage.
  4. Choose a reputable contractor to maximize your chances of acquiring the loan since the lender must approve the project managers. Have a written agreement detailing the obligations of each party and the precise sum to be paid throughout construction. To speed up the process, ask the lender to suggest people they have previously worked with.
  5. Have an architect design a house that fits the amount provided by the lender.

Requirement of a Construction Loan

Just like any other type of loan, there are specific parameters lenders will consider before approving the loan. Starters with limited credit history securing a loan can be frustrating.

The borrower’s credit history of a borrower reveals how accountable they are for timely debt repayment. This information is displayed on a credit report found in several sources like CRB- Credit Reference Bureau. Here are the requirements you must meet to qualify for a construction loan.

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Down Payment

Most lenders ask for a down payment before the construction starts. This is a way for the lender to caution themselves in case things go wrong and ensure you can carry out the construction cost.    

Detailed Description

You will be asked to submit comprehensive details, which generally comprise floor plans, cost and profit predictions, an estimated project timeframe, and a checklist of materials, subcontractors, and suppliers.

Ability to Repay the Loan

To be eligible for a construction loan, you must have a steady source of income and good credit. The lender will need to see this proof before committing to granting you the funds.

Qualified Contractor

To secure a financier for your project, you must have a competent and certified contractor. Include the current and previous projects in your loan application to ensure this is up to par.  

The Property Appraisal

Before approving any loan, lenders must perform an appraisal since loan qualification measures depend on the value of the completed product. The appraisals are location-exact and are based on market conditions.  

What Kind Of Loan is Best For Construction?

Building a home is not a one-size-fits-all process.  Different construction loans are available to meet future homeowners’ varying needs. It’s upon you to go for the one that meets your desires.

The table below shows a comparison of the types of construction loans in Kenya:

Type of LoanBest For
Construction -only -loansAre ideal for people with substantial liquid cash intending to clear the construction loan by selling their previous home
Renovation loansAre best for homeowners who are buying a fixer-upper and planning to invest in comprehensive renovations
construction-to-permanent loanBest for homeowners who want to save on closing costs and lock in mortgage financing
Types of construction loans in Kenya

Mistakes To Avoid When Applying For A Construction Loan

Taking a construction loan is a great way to reduce financial stress when, running significant renovations, when building, or when developing new rental units.

When applying for these kinds of loans, there is a high chance of making a mistake that can cost you the loan approval. Or an error will cause the repayment procedure to be complex long after the construction project is complete.

Keep reading to learn the mistakes to avoid throughout the construction loan application process.

Don’t Hire Any Contractor You Meet. Hire The Best Contractor For Your Project

The reputation of the person you choose as a contractor may speed or delay your facility’s approval and disbursement process.  This is because the lender must approve all lenders before the construction project start.

Don’t Draw The House Plan Before The First Approval Of Your Loan

It’s okay to have excitement over the hopes of your loan getting approved. It’s also OK to get nervous and want to share your house plan on social media.

However, having an architect design your house before your construction loan is approved is not okay.  If your architect designs a plan above the budget, you might run into trouble with your lender if they send an independent valuer over and find out your notes don’t align.

Don’t Lie To Your Loan Officer 

One reason loan repayment becomes a painful procedure is that some borrowers would rather lie to loan officers to have their loan approved; than tell the truth and let the system know what it is worth giving.

The problems begin when you can’t make payments on time after funding your project due to financial strains.  As a result, you end up with frequent defaults, unnecessary fines, and ultimately the lender auctioning your property to recover their money.

Bottom Line

After saving for some time and buying land, most individuals continue living in rentals for a while before saving again and building their dream homes.

Home construction is expensive when done in bits. Fortunately, banks and other financial institutions have noticed this gap and are attempting to capitalize on it. Therefore they are now offering various construction loans to landowners who want to build residential units.

You can choose the type of construction loan that best suits your needs and kick off the journey to build your dream home.