Owner builder home loans allow you to take control of your dream home build. As an owner builder, you act as the general contractor and oversee the entire construction process. This gives you more flexibility and can save money compared to hiring a builder to construct your home. However owner builder loans come with challenges and risks you need to consider. This comprehensive guide will explain what an owner builder loan is, the pros and cons requirements to qualify, and tips for getting approved.
What is an Owner Builder Home Loan?
An owner builder home loan, also called a construction loan, is specifically designed to finance building a custom home. With an owner builder loan, you obtain the land, hire contractors, purchase materials, and manage construction of your home.
Unlike a traditional mortgage, the lender disburses funds in phases as you complete certain milestones You only pay interest during the building phase, typically 6-12 months Once construction is finished, the loan converts into a regular mortgage and you begin making principal and interest payments.
Owner builder loans allow DIY homebuilders to create their dream home while saving on builder fees However, they require construction know-how and are riskier for lenders than financing a complete home purchase
Pros of Owner Builder Home Loans
Save Money – Owner building your home can save 20% or more compared to hiring a general contractor. You also gain equity faster by building rather than buying an existing home.
Custom Design – You can fully customize features and finishes when building from the ground up. Owner builders have complete control over floorplans, materials, and styling.
Learn New Skills – Acting as your own GC allows you to learn useful construction skills. Even if you hire help, overseeing the process expands your DIY abilities.
Earn Sweat Equity – Money you save by providing labor yourself counts as sweat equity. This equity allows you to borrow more while lowering mortgage payments.
Flexibility – Building on your own schedule allows you to work around your life. You can tackle projects gradually as time and money allows.
Potential Tax Breaks – Construction costs and mortgage interest may be tax deductible. Consult a tax pro to maximize write-offs for your owner builder project.
Cons of Owner Builder Home Loans
High Upfront Costs – You need upfront cash for land purchase, permits, design fees, materials and hiring subcontractors before getting any loan funds.
Complex Process – Construction scheduling, permitting, contracting and inspections add headaches. Delays can increase costs.
Skills Required – Lenders want to see construction experience. Learning on the fly risks budget overruns and structural issues.
Loan Denial Risk – Approval standards are stricter for these loans and borrowers with less experience are often denied.
Two Closings – You’ll pay closing costs when securing the construction loan and again when it converts to a mortgage.
No Interest Write-Off – You can’t deduct interest until the home is finished, up to two years later for complex builds.
Owner Builder Loan Requirements
Lenders have stricter requirements for owner builder loans than standard mortgages. Expect to provide the following:
- Down payment – Typically 20-30% of home value
- Credit score – Around 650 minimum, often 680+
- Debt-to-income ratio – Below 45% total debt payments
- Cash reserves – Up to 12 months mortgage payments
- Construction experience – Proof of skills equivalent to a GC license
In addition, you’ll need fully fleshed out blueprints, materials list, and budget. Lenders want to see contingency funds for unexpected overages too.
7 Tips for Getting Approved
Follow these expert tips to boost your odds of getting an owner builder loan:
1. Have a Large Down Payment – Put down 30% or more if possible. Bigger down payments reduce lender risk.
2. Boost Your Credit Score – Work over the 6 months prior to apply to improve your score above 700.
3. Lower Your DTI – Reduce debts and use savings to show lower monthly obligations.
4. Get Licensed – Take classes to earn a contractor or construction supervisor license.
5. Hire a Construction Manager – They can provide licensed oversight of your build.
6. Provide Comprehensive Plans – Details like floorplans, finishes, costs and timelines assure lenders.
7. Talk to Multiple Lenders – Find one experienced with owner builder loans who understands the process.
Where to Get Owner Builder Loans
Not all lenders offer construction loans, especially for owner builders. Here are some top places to look:
- Local credit unions
- Small community banks
- Online lenders like Lightstream and SoFi
- Mortgage brokers who arrange construction loans
- Bank of America, Wells Fargo and other big banks (higher credit score requirements)
Shop around and get quotes from multiple lenders. Look for construction loan experience and low credit score acceptance. Mortgage brokers can give you the most options by finding loans that suit your specific situation.
Alternatives to Owner Builder Loans
If you can’t qualify for an owner builder loan, alternatives include:
- 203(k) Rehab Mortgage – Finance buying and fixing up an existing home
- Home Equity Loan – Use home equity on a property you own to fund construction
- Personal Loan – Unsecured loan for smaller DIY projects and renovations
- Credit Cards – Dangerous but an option for urgent expenses before approval
- Hard Money Loans – Asset-based financing from private lenders at high rates
- Friends and Family – Borrow from people you know; set clear repayment terms
However, it’s challenging to fund an entire custom home build through these other options. Most are better suited to renovations or additions rather than ground-up construction.
Is an Owner Builder Loan Right for You?
Before applying, weigh the pros and cons carefully to decide if an owner builder loan aligns with your goals and abilities. The process requires strong financial qualifications, construction savvy, and determination. But it allows DIY-ers to create a fully customized home while earning sweat equity.
If you’re up for the challenge, an owner builder loan could be the key to making your dream home a reality. Just go in understanding the risks and with a solid plan in place. Do your homework to find a lender willing to finance owner builder projects. Then you can successfully manage your own home construction and save money in the process.
We promise to be as flexible as possible!
“Thanks for making our dream come true.”
“Owner Builder gave me an opportunity of a lifetime to build the house of my dreams! Everyone was friendly and helpful to work with. From the time I inquired about working with Owner Builder to the day I closed on the loan. The process was smooth! Everything asked for from OBL was reasonable and easy to produce. I would do the process all over again if given the opportunity!”
” I had this desire to build my beautiful home for me and my family for many years. When I started my construction, I realized this is going to be a magnificent home and I had difficulty getting a construction loan from a traditional lender, Owner Builder Loans was a Blessing!! I thank Everyone at owner Builder Loans, Great team, great owner, great staff, they understand Owner construction like no other lender. They made my home a reality! Thank you, Owner Builder Loan, for coming to my rescue!! “
“I wanted to thank you guys again for helping me achieve my dream, which I had since I was a small child, you guys are truly God sent for opening an avenue which I needed and made it possible to pave the way. Thanks for believing in our dreams. I hope I can work with you guys in the future, as I have more dreams to fulfill and will definitely be reaching out to Fred soon to discuss. Keep up the Great Work and let me know if you guys need anything from me. IT WAS ALL A DREAM, BUT…”
Loan FeaturesSelf Build your house – your way. This is the easiest and most flexible construction loan for any one building their own home!
- No application fee and no credit report fee. This means you can find out if you qualify, and if you do, what the conditions and terms will be without incurring any charges.
- Our construction loans are for 12 months with no pre-payment penalty. Extensions are available. Upon completion you will refinance through your preferred mortgage lender.
- Unlimited draws are provided with no draw fees, or inspection fees.
- Construction draw requests can be made up front by phone or email. Draws can be sent via ACH, wire transfer or by check.
- It’s ok if construction has already started.
- Loan amounts up to $500,000.
- The Minimum Down Payment Requirement is equal to 35% of your Total Cost of Project
Example
$100,000 Current value of the dirt + $200,000 Cost of construction and site improvements $300,000 Total Cost of Project X 35% $105,000 Required Down Payment
In this example, the borrower needs to possess $105,000 of down payment prior to receiving $195,000 in construction funds.
The down payment is defined as today’s current value of the dirt, less any money you owe for it, plus the cash you have paid or intend to pay towards construction prior to closing on your construction loan.
Exceptions for a down payment less than 35% may be possible for those with a credit score of 775 or higher.
- Minimum Credit Score requirement is 725. Exceptions for lower scores may be possible for those with a down payment higher than 35% equity.
- Other Requirements exist.
For a free assessment of your qualifications, please submit our Qualification Questionnaire. Our reply will include loan features, all requirements and loan costs.
Owner Builder Loans: Financing Your Lot and New Home
FAQ
Will a bank loan you money to build your own house?
What is the minimum FICO score for a construction loan?
Is it harder to get a construction loan than a mortgage?
Does Wells Fargo do construction to permanent loans?
What is a home build loan?
It’s also called a DIY home build loan or an owner builder construction loan. To qualify for any kind of construction loan, you usually need a qualified builder — meaning a licensed contractor with demonstrable experience building homes — to sign on to lead the project.
What is a home construction loan?
A home construction loan requires a different approval process than a conventional mortgage. Construction loans typically require a larger down payment or existing equity. There is more risk associated with construction loans, so interest rates may also be higher than interest rates for a standard mortgage.
What is a self build construction loan?
A self build construction loan is a specialty loan that borrowers use when they plan to build a residential home and act as the general contractor during the construction process. It’s also called a DIY home build loan or an owner builder construction loan.
Do you need an owner-builder construction loan?
If you’re a general contractor or professional builder and you want to build your own home, an owner-builder construction loan could finance your project. With this loan, the homeowner is responsible for acting as the builder and providing the necessary information to the lender to keep the project moving forward.
What are the requirements for an owner-builder loan?
Owner-builder loans have unique requirements, including: A construction plan: You’ll need to put together a detailed plan for your construction process, including who will be involved, what materials you’ll use, the timeline of the work, and more.
Can a construction loan help you build a home?
A construction loan can help you design and build your dream home. However, these loans function differently from traditional mortgages, and they come with some unique qualifying requirements. If you’re considering this type of financing, here’s what you need to know before you commit.