Understanding Construction Financing and How it Works

Construction financing is a type of bank-issued short-term loan which is created to finance a home or real estate project.

This article will help you understand what construction loans are, how they work, and where you can access them.

Construction financing can be applied by anyone who is investing their time and money in construction or related expenses.

You can use a construction loan to pay for building equipment used in construction, building materials, or for hiring employees.

Also, read on how to bid on construction projects

Steps to follow when sourcing for construction financing

1. Source for the best institution for construction financing

You need to look for a financial institution that offers the best rates and terms on construction loans to prospective home-owners.

You need to ask questions regarding the finance process and repayment methods to ensure that you can finance it according to your timelines.

2. Determine how much you can afford

You need to get the lending institution to pre-approve the loan so that you can determine how much you can get and how much you can afford to repay in instalments.

Be honest while offering personal information to the lending institution; this will help you avoid repayment issues in the future.

3. Interest rates

The loan officer needs to help you understand issues around the interest rates.

You may either agree to lock the interest rate at an agreed percentage which cautions you from rising interest rates later or you can either float the interest rate in the hope that it will not shoot up.

You also need to inquire if the rates will remain the same after completing your house and converting the loan into a mortgage.

4. Get a reputable contractor

After you get construction financing, you need to look for a reliable contractor for the project.

Note: The lender must first approve the builder before it agrees to finance the construction.

To caution, yourself enter into a written construction contract with the builder clearly outlining the responsibilities of each party as well as the amount the builder expects to receive.

Also, read on what to do if a bank says no

You may also ask the lender to assist in looking for recommended companies they have already approved to fasten the process.

Lenders will evaluate how much relevant experience you have as a developer and the background of your project team.

5. Plan construction according to finance

While designing a house, an architect might come in handy.

The architect should come up with a design that is within the amount provided by the lender after the initial approval of your construction loan application.

An independent valuer will be asked to assess the house plan so you must be accurate as possible for the lender to release the funds.

Make sure the house plan is within your budgeted amount.

Institutions to access construction financing

  1. Gulf African Bank

For you to access construction financing from this bank, you need to have the following requirements.

  1. A completed credit SME application form
  2. A business registration certificate
  3. Certified/original bank statements for the last two years
  4. Copy of ID/Passport
  5. Certificate of official title search (with a minimum lease of 45years)
  6. A Copy of title of the property
  7. You have to get a confirmation that ground and land rates are fully paid to the City Council, with attached receipts
  8. Approved building plans (for new properties)
  9. NEMA certification
  10. Notification by approval of local authority with a minute number
  11. Certificate of compliance from the District Physical Planning Officer
  12. Profile of the contractor, the architect, and other professionals
  13. Project schedule

The repayment period of the Gulf Bank is between 1-10 years.

2. Family Bank

The family bank offers construction loans for both residential dwelling housing as well as estate development.


  1. A copy of the title to the property
  2. A copy of ID/PIN certificate of individual/ Business (Directors)
  3. A valid Sale agreement/letter of offer from the seller
  4. Pay-slips for the latest three months
  5. Letter from employer confirming employment status
  6. Bank statements for the latest six months
  7. One passport size photographs

3. Commercial Bank of Africa

CBA offers to finance for individuals looking to construct income-generating housing.


  1. Proof of income
  2. Proof that you can meet the 20% financing and other related costs, e.g. Stamp duty, lawyers fee, valuation report etc.
  3. Bills of Quantity from qualified QS in banks’ panel

For the CBA loan, you can have a minimum loan limit of Ksh. 5 million, a free cover limit of Ksh. 20 million and below and interest rates are pegged to the CBR for local currency

Also, read on how to get a small business loan

4. Stanbic Bank

The Stanbic loan offers clients the following as a construction finance option:

  1. They provide loans for the development of single residential properties or purchase of off-plan houses.
  2. The bank finances up to 90% of the total construction cost as per Bill of Quantities from a duly registered Quantity Surveyor
  3. You must be a salaried individual with a minimum gross salary of Ksh. 100,000
  4. Stanbic only develops residential property
  5. You will pay interest on amounts drawn in a maximum construction period of 12 months.
  6. Your loan will be converted to a mortgage with a maximum tenure of 20 years
  7. You can make lump sum deposits and withdrawals on your home loan account at no cost once the loan is converted into a mortgage.
  8. Your loan is embedded insurance in the loan repayments as a benefit.
  9. The loans are only available in Ksh. Only.
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Beth is a Kenyan Journalist with a passion in matters Kenya. She is knowledgable about the country of Kenya and shares her knowledge with our readers.

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