How to Get an Owner Builder Construction Loan
Sep 09, 2020
Owner builder loans are for borrowers wanting to build their own home without a general contractor. Banks and credit unions sometimes do not lend to owner builders, especially in low build areas where there is not a lot of construction taking place.
I want to give you my best advice in approaching lenders when it comes to owner building.
First, get organized. Know what you qualify for first and then know the real cost to build in your area and then know the process.
- Get qualified
- Know the real cost per square foot
- Know the process.
I have a simple 11-module course that helps you through those three steps. This course includes single-page worksheets that tell you a lot of information, especially how much homes are being built for in your area based on square feet. If you are new to owner building, I would take this course.
Now, if a bank will not qualify you without a General Contractor on board, here are the best solutions to deal with that.
Ask the bank if an owner builder course can replace the GC. HowToBuildYOurOwnHome.com is a link you can share with the bank. This very site gives everything you need to be your own GC and manage a construction project with better information and preparation. In some states they have no GC licensing requirement, so lending should not be as difficult. In other states licensing is regulated and the banks often follow along and require a licensed contractor. In most states, the rural areas are less regulated in licensing but more difficult to get lending. In any case, ask if an owner builder course that is highly detailed and organized can be sufficient to replace a GC.
Ask if any GC will consult on a project and then ask the bank if they will allow for this. As a general contractor, I have done this many times in my career. I served not as the GC, but I did consult through the process. I now do this with students around the country. Keep in mind a consultant does not replace the liability that a GC takes on. This is still your responsibility lenders will ask that you carry your own insurance and liability on the project. As a consultant, many builders will charge between $3,000 and $5,000 for their service as a construction consultant.
If the lender is still needing a GC, ask around to see if a GC is willing to manage up to mechanical inspection only and then you take if from there. They keep their sign on the project but you take over the finish side of things. I have signed a contract with clients where I agree to build up to 7-way inspection and then not charge any of my fees after that phase, but I will still run the project as. This is saving my client $11,456 in contractor fees but I have less hassle with the finish side (paint, carpet, tile, misc. carpentry etc.) It is important to know that General Contractors make most of their money up to mechanical ad not after, so they may be inclined to take this offer.
Some lenders are leery of owner builders because they find it risky to work with anyone but a licensed general contractor with some experience. Other lenders will structure the loans with clear incremental completion dates and higher contingency requirements to ensure the project is under budget and on time.
Once the lender approves the the owner builder finance loan, detailed plans of the project need to be drawn up. Creating a list that identifies and prioritizes every piece of the project, from the size of the floor drain in the garage to the shape and style of the shingles on the roof, all this gives the lender a framework they can use to keep the borrower and project in line. Once this is done, an appraiser reviews all of the specifications, considers the value of the land, the finished product and similar homes in the neighborhood to make an estimated appraised value. They will offer a CMA, a comparable market analysis to see if the home can appraise for the amount needed to build it. This is the initial amount from which the lender calculates LTV (Loan to Value).
Down payments can vary for this type of loan. If the lot is already owned, it can be part of the equity (down payment) calculation, with the lender financing the remainder of the project. Lenders typically require 20% to 25% of the eventual completed value of the residence must be put down. However, an FHA mortgage allows the owner builder to finance purchasing the lot, constructing the home and the permanent mortgage with 3.5% down, with only one closing at the beginning of the process.
Construction loans include short-term repayment windows of generally 18 months or less. Repayment is generally interest-only payments that fluctuate with the market as construction progresses. At the end of the construction, when the home is ready for occupancy, the owner builder will need a new mortgage to pay off the construction loan. This scenario requires two closings, one for the construction mortgage and one for the permanent financing (construction take-out). The single-close construction loan is popular because it only has one closing-at the beginning of the project. The borrower should know that interest rates fluctuate and consider whether to take an interest rate at the beginning, only to be stuck with it in a falling interest rate environment.
What are some common construction loan purposes?
- All-in-one construction to permanent loan. One loan covers acquisition, construction and the 30-year repayment schedule
- Construction completion. Funding was inadequate to finish the project
- Construction take-out is the 30-year mortgage that pays off the construction loan
- Ground-up construction where the builder already owns the land for his house
- Lot and construction. One mortgage loan to buy the lot and do the construction project
- Existing structure rehab/renovation/remodel construction loans
What are some examples of owner builder mortgage loans?
- Equity driven private lender mortgage up to 65% LTV
- Owner builder fix and flip loans at 90% LTC and 70% LTV
- Licensed builder owners for 6, 9 or 12 months (often with extensions available) up to 75% LTV and up to 90% LTC
- Amounts up to $3,000,000 and up to a 24-month term.
- In-house draw administration, one-time close, Conventional at 95% LTV, VA at 100% and FHA at 96.5
- 30-year fixed with one close, no credit prequalifying, stick-built, manufactured or modular.
- Up to 50% of land value and 100% of construction costs
How do I find an owner builder construction lender?
Whether you need an owner builder construction loan in California, Idaho, Utah or any other state, work with local credit unions first, then local banks. Start there and find out how much you qualify for first.