Achieving Your Dream Home With An Owner Build Construction Loan

For many people, building their dream home from the ground up is the ultimate goal. Being able to customize every detail and make all the decisions on the design can be incredibly rewarding. However, taking on a new construction project requires proper financing. That’s where owner build construction loans come in.

In this comprehensive guide, we’ll explain everything you need to know about owner build construction loans. You’ll learn what they are, how they work, eligibility requirements, costs and fees, and how to apply We’ll also provide tips for first-time builder-owners so you can successfully finance and complete your custom home build.

What is an Owner Build Construction Loan?

An owner build construction loan is a type of mortgage financing used by individuals who plan to build a new home and act as their own general contractor. Also called a builder-owner loan, owner-builder loan, or DIY construction loan, this specialized financing helps you fund the home building process from start to finish.

With an owner build loan you take on the responsibility of overseeing construction yourself. You may work with subcontractors in different trades but you manage the scheduling, permitting, budget, materials purchasing, and other details. The loan provides the capital needed to cover land purchase, construction materials, labor, and other building costs.

Owner build loans are usually structured similarly to a standard construction loan. However, you take on more of the responsibility that a professional homebuilder would with a traditional construction loan. You need to demonstrate construction know-how.

How Do Owner Build Construction Loans Work?

Owner build construction loans function in a few key ways:

• The loan amount covers all hard construction costs, soft costs, contingency funds, and land purchase if needed.

• Rather than a lump sum, the loan is disbursed incrementally as certain stages of construction are completed.

• Only interest payments are due during the construction phase, which typically lasts around 6-12 months.

• Once construction is finished, the loan converts to a traditional mortgage with regular principal and interest payments.

• Interest rates are typically higher than conventional mortgages, but allow you to access funds for construction.

• Down payments tend to be higher than conventional loans, often 20-30%.

Throughout the building process, you’ll work closely with a loan officer to draw on the funds as needed. They’ll evaluate if you’ve hit the required milestones for further payouts.

Owner Build Loan Eligibility Requirements

Qualifying for an owner build construction loan is more challenging than a conventional mortgage. Because you take on the construction process yourself, lenders want to see evidence you can handle the responsibility. Typical eligibility requirements include:

• Good credit – Most lenders require a minimum credit score of 680 or higher. Some may accept scores as low as 600.

• Sufficient income and assets – Your income, assets, reserves, and debts will be reviewed to assess repayment ability.

• Construction expertise – You’ll need to provide documentation proving you have the knowledge and skills to act as builder-owner. This could include prior building experience, licenses, completed training programs, hiring a qualified project manager, or having a complete set of permit-ready plans.

• Down payment funds – Expect to put down 20-30% of total costs. Some lenders may allow as little as 10-15% down for those with excellent credit.

• Property appraisal – The land or lot will be appraised to ensure the project is feasible and worth the investment.

Meeting these standards gives lenders confidence you can successfully complete the home build.

The Costs of Owner Build Construction Loans

While owner build loans provide excellent financing for new construction, you’ll take on higher costs compared to buying an existing home with a conventional mortgage. Be aware of these key costs:

Higher down payment – As noted above, most owner build loans require a 20-30% down payment. With a conventional mortgage, you may only need 3-20% down.

Higher interest rates – Interest rates on construction loans tend to run 0.5 to 1 percentage point higher than conventional mortgage rates.

Closing costs – You’ll pay closing costs on the loan, including origination fees, appraisal, legal fees, and title insurance. This totals 2-5% of the loan amount.

No long term rate lock – With construction loans, you usually can’t lock your post-construction conversion rate more than 90 days out. So your eventual rate and payment may fluctuate.

Short repayment term – Owner build loans typically have a 6-12 month term. If the project experiences delays, you may need to pay an extension fee or obtain alternative financing.

No traditional mortgage yet – You’ll need to convert to permanent financing once construction is done. This involves another application and underwriting process.

While owner build loans enable you to achieve the dream of building your own home, they come with trade-offs to understand upfront.

Tips for Getting Approved for an Owner Build Construction Loan

If you’re considering applying for an owner build construction loan, here are some tips to help secure approval:

• Seek out lenders that specialize in owner build loans. Not all lenders offer these specialized products.

• Understand what documentation the lender requires to prove construction knowledge – this varies by lender but may include permits, contractor licenses, build plans, or inspection reports.

• Have a detailed construction plan and thorough budget prepared. The moreButton-Down planning you show, the better.

• Be ready to provide bank statements proving you have funds available for the down payment and extras beyond the loan amount.

• Build up your credit score as much as possible – aim for at least 680. Pay down debts and correct any errors on your credit report.

• Compile all financial statements the lender requires such as tax returns, bank account info, employment verification, profit and loss if self-employed.

• Explore down payment assistance programs that help provide part of the required down payment funds.

Going above and beyond on preparation and documentation can help your owner build loan get approved.

How to Apply for an Owner Build Construction Loan

These are the usual steps to take when applying for an owner build construction loan:

1. Choose a lender – Research lenders with owner build loan options and compare interest rates, fees, loan terms, and borrower requirements.

2. Submit your application – Complete the loan application providing all required personal, employment, income, asset, and financial details. This is similar to a conventional mortgage application.

3. Get pre-approved – The lender will review your details, credit, and down payment funds available to provide a pre-approval letter if you qualify.

4. Provide construction plans – Work with an architect to create detailed construction plans and blueprints. Provide the lender with a cost breakdown, timeline, list of subcontractors, and permit documentation.

5. Order appraisal – The lender will send out an appraiser to evaluate the land value if you already own the lot.

6. Approval – The lender will extend a loan offer with specific terms if your full application is approved.

7. Closing and funding – Once you accept the loan offer, you’ll close the loan, pay closing costs, and funding will be set up.

8. Construction – Now you can break ground! Funds are disbursed in draws as you complete project milestones.

The entire application and funding process typically takes 1-2 months with an experienced lender.

Pros and Cons of Owner Build Construction Loans

Owner build construction loans offer great benefits like custom home flexibility and potential cost savings. But you also take on heightened risks and responsibilities as the builder-owner.

Pros

• Design and build your home customized to your needs

• Potentially reduce total costs by acting as your own GC

• Stage-based loan disbursements provide needed capital

• Only pay interest while building; principal kicks in once construction is complete

Cons

• Require high interest rates and down payments compared to conventional mortgages

• Require hands-on project management and construction skills as builder-owner

• Permitting and construction delays can increase total loan costs

• Short 6-12 month repayment terms limit wiggle room if issues arise

For those with construction know-how, owner build loans unlock big benefits. But you need the skills and diligence to manage the building process yourself.

Partner With the Right Lender for Your Owner Build Loan

Finding the right lender is critical to get approved for your owner build construction loan and provide guidance throughout your project. Look for these traits:

• Construction loan expertise – They should have extensive experience with owner build loans specifically.

• Down payment flexibility – Look for options for as low as 10% down if you have excellent credit.

• Reasonable credit score requirements -Minimum scores around 620 demonstrate more flexibility.

• Clear documentation requirements – Ask what they require to prove your construction readiness.

• Strong customer service – You want a supportive lender who will be your partner through the entire build.

• Streamlined application – Look for an easy application process with rapid pre-approval.

The right lender makes the financing process smooth and sets you up for success building your dream home.

Turn Your Vision Into Reality With Owner Build Financing

If you have the skills and dedication for a major construction project, an owner build loan allows you to create your perfect custom home. With proper preparation, smart budgeting, and an experienced lender on your side, you can minimize risks and bring your vision to life.

While the process requires significant commitment, the sense of accomplishment and pride from building your own home makes it worthwhile for many. Turn your blueprints into a beautiful new home with an owner build construction loan designed for builder-owners.

Frequently Asked Questions

What credit score do you need for an owner build construction loan?

Most lenders want to see a minimum credit score of 680-720 for approval on an owner build construction loan. Some lenders may accept credit scores as low as 600 or 620. The higher your score, the better your loan terms will be.

How long does an owner build construction loan last?

A typical owner build construction loan term lasts 6-12 months. This provides the allocated timeframe for completing construction of the home. If extra time is needed, you may be able to pay an extension fee to the lender to extend the loan.

Do owner build loans roll into mortgages?

Most owner build construction loans are designed to roll over into a traditional fixed-rate mortgage once construction is completed. You’ll need to submit updated financial documentation and go through underwriting again for the permanent mortgage.

What percentage down is required for an owner build construction loan?

Expect to make a down payment of 20-30% of total project costs for an owner build loan. In some cases with excellent credit, lenders may allow down payments as low as 10-15%. The down payment with an owner build loan is higher than a conventional mortgage.

Can an owner build construction loan fall through?

Yes, it is possible for an owner build loan to fall through if you fail to meet the lender requirements. Reasons a loan could fall through include credit score drops during the process, failure to provide adequate construction expertise documentation, inability to provide the down payment, or big changes in your employment or finances.