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Choosing to be an owner-builder can make finding financing for your homestead construction project a little harder than hiring a general contractor. Part of the issue is that as an owner-builder, your county may not require you to have construction experience, but your bank definitely wants to know that their investment – your newly built home – will pass inspection and be something people can live in. Plus, as an owner-builder, you probably will need to apply for an owner-builder loan, not just a regular construction loan.
Construction loans, in general, are difficult to obtain, but owner-builder loans can present even greater challenges. It’s not impossible to get one, but you need a solid set of steps to work up so you can get your funding and complete your home. We’ve created a simple break-down of the steps you’ll need to take to get an owner-builder construction loan and start creating your homestead home.
Step 1: Learn about Construction from a Pro
Spending some time talking and communicating with a general contractor or other contracting professional will give you important insights. Remember, as an owner-builder, you are stepping into the role of the general contractor. You are responsible for all aspects of your construction, even if you hire a management company. Having the insight and guidance of a professional can help you avoid pitfalls like under or over-purchasing materials or hiring un-qualified sub-contractors.
Step 2: Locating Construction Lenders that work with Owner-Builders
Next, you want to locate lenders that work on construction loans. These lenders are also more likely to offer owner-builder lending. Each lender will have slightly different requirements. In general, they’ll want you to have a building plan, a project timeline, meet standard lending qualifications like debt-to-income ratios and credit score minimums. Some may require you to get some certification in construction to show you have the knowledge to manage the project. You can also hire a project manager or construction management firm to help cover this requirement but remember, ultimately, the responsibility for completion is on you.
Additionally, since the housing market collapse in the early 2000s, these loans are harder to qualify for, and many financial institutions are hesitant to offer any kind of construction loan. You may face higher fees, and they may require two closings – one when you start construction and one again when the loan converts to a conventional loan. Two closings means you’ll have to pay closing costs twice.
Step 3: Creating your Owner-Builder Business Plan, Budget, and Project Timeline
Like any builder seeking funding, your lender will want to see a business plan for your project. Your business plan needs to include your house plan and your project’s full size, including outbuildings, septic, or a well. You’ll need to put together a list of labor costs and a full cost of materials, including building permits and inspections. They’ll want to see a building timeline and provisions you’ve made to handle common construction issues. How long will these holdups take? What adjustments to the timeline can they expect. Make sure your building business plan is thorough, and don’t be discouraged if they send it back and ask for more.
Step 4: Make sure your Financial Background is clean.
The restrictions a financial institution sets on an owner builder construction loan may be much tighter than usual. Your lender will check for the same information they’d want if you were pursuing a conventional loan. They’ll be checking your debt-to-income ratio; that’s the amount of debt you have versus how much you make in a year. They’ll want to know your credit score; the higher, the better. Your lender may also ask you for a down payment of up to 30% of the loan’s total cost.
Step 5: Approval, Building Completion, and Owner-Builder Construction Loan Conversion
Once you’re approved for your owner-builder loan, you can work on building your house! When construction is complete, your loan will convert from an owner-builder construction loan to a standard home loan. One of the biggest benefits of an owner-builder loan is during this stage.
When your loan converts from a construction loan to a conventional home loan, the difference between the cost of construction and the home value is considered a down payment. In other words – if your home’s new market value is $350,000, but construction of your home only costs $300,000, the difference of $50,000 is considered a down payment on the new conventional loan. In addition, you may qualify for a lower interest rate.