A journey of a thousand miles starts with a single step. For first-time homeowners, the process of owning a home starts with identifying a nice place and purchasing land. Once that is done, how then do you finance the construction of your dream home? Paying rent can feel like a burden to those who already own land.

After saving for a while and buying land, most people will leave their plots vacant for some time before they can save again and start to construct their dream homes. This is true for most people, especially those in the lower middle class.

Constructing a home is costly when done in bits. For some people, the process can take in excess of three years before moving into their new home.

Today, banks and other financial institutions have identified this gap and are looking to capitalize on it. Most of them now offer construction loans - a financial product aimed at those who already own land and are looking to build residential units on them.

What is a construction loan? Also called a self-build loan, a construction loan is used to finance the building of a home. It is used to cover the costs of a construction project before one can obtain stable funding.

A construction loan is an answer to those who own land and are looking to build their dream homes. With this loan product, you now do not have to wait for long to save and start the process of building your dream home.

As a landowner, a construction loan is the easiest way to expedite your journey from a tenant to a homeowner.

Unlike other types of loans, the loan is disbursed to professionals who are selected to manage the project.

Note also that the payments are made in installments for different stages of the construction. Unlike a mortgage, construction loans often have higher interest rates as most financial institutions consider them risky.

Construction loans are of three types: Top-up loans, Rehabilitation or restoration, and Building new homes.

What are the requirements of a construction loan? Just like other types of loans, there are some requirements the bank will look at before advancing the loan. For starters, it can be frustrating securing the funding for those with 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 a number of sources, including the CRB – Credit Reference Bureau.

In Kenya, most construction financiers will require about 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

Disclaimer: The requirements of some banks and other financial institutions may vary from the ones listed. More information on the same can be obtained from the lender you seek to pursue.

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 favorable 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 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, a number of banks and other financial institution offer building loans. To get you started, here are some of the lenders you might want to check out: