What are the conditions for getting a bank loan to complete an unfinished house?

According to Karin Ossipova, whether the project is unfinished or construction is starting from scratch, the bank must be provided with the required documentation, a construction project and a well-considered plan of the construction stages.

“As the preparatory work required to obtain a loan can be time-consuming and complicated, some people give up before they even start. At the same time, thorough preparation is important both for the builder and for the bank,” Ossipova explains.

A construction project and building permit provide assurance that the project complies with current requirements and has been reviewed by specialists. In addition, the bank assesses the background and experience of the construction company and checks whether the company is registered in the economic activities register as a provider of construction services. If the builder is not listed in the register, owner supervision must be involved.

“As a rule, the bank does not favour self-building, except in cases where the person has the necessary qualifications and experience. Even then, owner supervision must be involved and the relevant agreement must be submitted to the bank,” says Ossipova. These requirements help ensure that the construction is of good quality and that the house will eventually receive an occupancy permit.

The bank also wants to see that the loan applicant, together with the builder, has thought through the construction stages, budget and schedule. The aim is to avoid a situation where, in the final stage of construction, it becomes clear that the actual cost exceeds the initial plans. The situation becomes particularly difficult if there is no financial buffer in the form of savings or other assets and the bank cannot provide additional financing due to the borrower’s repayment capacity or insufficient collateral value.

According to Ossipova, the loan application must also include an expert valuation indicating both the current market value of the property and its estimated value after construction is completed.

In addition to the required documentation, the applicant’s repayment capacity remains important for the bank. If the applicant’s payment history and income are in order, the bank assesses the construction plans and collateral. Usually, the same property on which the house is being built is used as collateral. Depending on the stage of construction, additional collateral may sometimes be required, but this can be avoided, for example, with sufficient self-financing, a co-financing loan from the Rural Development Foundation (MES) or a guarantee from the Estonian Business and Innovation Agency (EIS).

According to Ossipova, obtaining a loan is generally easier if there is already an unfinished building on the property that the applicant wishes to continue building and the property already belongs to the loan applicant. At the same time, it is worth carefully assessing together with an architect and builder whether it makes sense to continue with the existing structure or whether it would be more reasonable to demolish it and start from scratch.

“The owner must make that decision together with specialists; the bank does not provide advice in this respect. If the plan is to continue using the existing building, its condition should be assessed by an independent construction expert,” Ossipova recommends.

According to Ossipova, the most risky construction stage for the bank is when utilities are being built and the shell of the house is being erected. In this phase, construction costs often increase faster than the market value of the property. For this reason, the interest margin on construction loans is usually somewhat higher during the construction period. The bank’s workload is also greater than, for example, when financing the purchase of a completed apartment. In addition, there is always a risk that the building will not be completed and the planned market value will not be achieved. After the occupancy permit has been obtained, the interest margin is generally reduced.

Unlike the purchase of completed real estate, a construction loan is disbursed in instalments according to the construction stages agreed in advance. During the processing of the loan application, the bank already checks that the loan is sufficiently secured at each stage. Before the next loan instalment is disbursed, the borrower must submit photos and an overview of the work completed to confirm that the funds have been used for the agreed purpose.