The Definitive Guide to Owner Builder Construction Loans

House Under Construction Along with Blueprints
© Romolo Tavani / Fotolia

Building your dream home is never a simple or cheap endeavor. Most land owners pay a large amount of money to have a general contractor come in and build the house for them. However, there is an alternative which gives you more control at a lower cost. This alternative is known as an owner-builder construction loan and may or may not be the key to creating your dream home.

What is an Owner-Builder?

Builder Showing Owners House Design Plans
© alotofpeople / Fotolia

An owner-builder is a land owner who acts as their own general contractor when building a house. This requires the owner to handle several tasks and may be too difficult for someone who lacks experience in handling large projects. Loan companies will often require some background in construction or the hiring of someone with that knowledge. If you have the skills necessary, being an owner-builder is a more cost-effective, albeit more involved, way to manage the project.

What Does an Owner-Builder Do?

There are numerous tasks which an owner-builder is responsible for. At the most basic level, you will be responsible for creating your own construction budget, hiring sub-contractors, and overseeing the construction process. On a deeper level, there are numerous smaller duties and considerations, including:

  • Obtaining all building permits required
  • Purchasing all necessary materials
  • Scheduling contractors to avoid delays
  • Sorting out potential conflicts of interest when two contractors are working in the same space
  • Disbursing funds

Being an owner-builder does not require you to perform any of the construction yourself, although you have the option of picking up a hammer to save even more. As you are responsible for obtaining the construction materials, you also have the ability to better control the types and quality of materials being used.

What Skills Are Necessary?

There are three important skills you should have if you wish to be an owner-builder. The first and foremost is budgeting skills. Without a good budget, you will be unable to provide the materials and payments required to get the job done.

Second to budgeting is experience in construction. Not only will you need this experience when overseeing the contractors and for scheduling the work, but most lenders will not grant funds if you cannot prove construction experience. One way around this is to hire either an on-site project manager or construction management firm.

The final skill necessary is leadership. You will be coordinating a combined workforce on a complicated project. You may have to settle the occasional dispute when two subcontractors are trying to work in the same space. At other times, you will need to relay information from one subcontractor to another and make important decisions on short notice when something goes wrong.

Delegating Responsibility

Construction Manager Giving Instructions to Worker
© Kadmy / Fotolia

One of the biggest benefits to having an owner-builder loan is the ability to oversee the project yourself. Unfortunately, obtaining the loan often requires someone with a certification in construction to be involved in the project. Thankfully, there are two cheaper alternatives to hiring a general contractor, both with their own benefits and drawbacks.

On-Site Project Managers

When acting as an owner-builder, you’re filling the role of general contractor. On-site project managers take a large portion of this responsibility off of your shoulders by managing your project during the day. The downside is that project manager fees may reduce the amount of equity you earn.

Construction Management Companies

Hiring a construction management firm is by far the cheapest option. Unfortunately, these firms will also perform the least amount of work. This is a good option for when you plan to oversee the project yourself but require the assistance of someone with a certification in construction to obtain your loan.

Benefits of Owner-Builder Loans

Home Investment Considerations
© faithie / Fotolia

There are several benefits to having an owner-builder loan which can make life a little easier during and after construction. The following tend to be the primary reasons people consider getting a loan of this type:

Instant Equity

By building your own home, you can create instant equity. This gives you the ability to refinance, take out a second mortgage, or even sell the home once it’s built. The same amount of equity can take years to build up normally, making the loan an investment with quick returns.

Save Money Both Now and Later

Owner-builder loans can save anywhere up to 40 percent of your construction costs, depending upon whether you do everything yourself, hire help, or enlist project management. General contractors alone may charge as much as 20 percent for their services, so the more you do, the more money you save.

This money also translates to a smaller mortgage with smaller monthly payments. If you choose to put some of the money you saved back into the mortgage, you can drastically reduce the amount of interest you will be paying off years down the road.

Control Equals Satisfaction

Being an owner-builder means you have full control over the project, from materials to coordinating builders. You even have the option of building the entire home yourself, if you have the know-how. This means things are done to your specifications, and you have the satisfaction of knowing that you had a hand in every step of the construction. This can make your dream home even more special.

The Drawbacks of Owner-Builder Loans

Protecting Home from the Elements
© dmshpak / Fotolia

As with any type of financial decision, owner-builder loans aren’t without their drawbacks. In most cases, you may find these issues are worth the hassle, but they may prove too difficult if you are starting from scratch.

Difficult to Obtain

With the current economy, these loans are becoming increasingly difficult to find. Lenders who offer these loans consider them to be high-risk and often require a certification in construction before they will consider the loan. You can fulfill this step by hiring a project manager or construction management firm, although that will also cut into the project’s budget.

Higher Fees and Multiple Closings

Due to the added risk of construction loans, lenders generally charge a higher fee for them. Owner-builder loans are no exception, so be prepared for the cost. In many cases, the lender will further protect their investment by requiring two closings: one before you break ground, and the other when construction is complete. If you change to a traditional loan at some point, you may have to pay additional closing costs.

How to Obtain an Owner-Builder Construction Loan

Loan Approval Documentation
© cacaroot / Fotolia

Owner-builder construction loans are often very difficult to obtain due to factors such as risk and the economy. These factors are not impossible to overcome, although they may require some shopping around to find a good lender. Construction lender directories allow you to get quotes from multiple local lenders at once. Consulting with an experienced builder and researching the process of constructing a home from scratch are vital steps which should be performed before even attempting to get a loan.

Creating a Business Plan

Building a house is a complex task, and lenders will want assurance you know what you’re doing. You should have a full business plan prepared which gives a projected timeline for the construction, as well as provisions for any possible delays. All expenses should also be covered, especially:

  • Building permits
  • Material costs
  • Labor fees

Qualifying for the Loan

Lenders who offer owner-builder loans will be examining your financial background extensively to ensure they will be reimbursed. The information reviewed includes:

  • Income
  • Credit score
  • Cash reserves
  • Debt-to-income ratio

In addition, lenders will generally want a down payment valued at up to 30 percent of the loan amount, and may allow for land equity. Your business plan is extra assurance that you are aware of what you are doing. Finally, the lender may require that someone with a certification in construction be involved in the project before approving the loan.

Post-Approval Steps

Once you have been approved, you will need to gather your workforce. Make sure that all sub-contractors offer a guarantee and have a good reputation. Check the local building authorities for any complaints and also ask to see their previous projects. The more references and background you have for a sub-contractor, the smaller the chance you will run into quality or efficiency issues.

If you are not living on-site or are involved in the building aspect of the project, you should visit the site at least once per week to check progress and meet with your sub-contractors. The more involved you are, the less likely you will run into delays. As this is an investment, your presence will not only save money, but will help ensure the final project is everything you wanted it to be.