- Owner builder construction loans are harder to find.
- To qualify for an owner builder loan, you’ll need to prove that you have the required skills to complete the construction project.
- Owner builder construction loans can be used for purchasing real estate and the construction project.
YOU’RE GOOD WITH YOUR HANDS, and you know your way around a building site, but finding the right lender for an owner builder construction loan is a different story. Understanding the ins and outs of mortgages can be daunting for newcomers. Even mastery of the English language can’t save the uninitiated, with industry lingo and terms like DTI, LTV, and AT&T masking simple concepts in jargon and lingo.
That last acronym was a joke, but owner builder mortgages, in particular, can be complex. The following guide will help you understand the ins and outs of this niche financing option before breaking ground on your next residential or commercial construction project- so be confused no longer and read on.
Fast facts: Owner builder loans
An owner builder construction loan is a loan that is specifically designed for homeowners who want to act as their own general contractor to build their own home, as opposed to having a professional general contractor or builder construct the property. These loans are also known as self-build loans.
These loans are different than the types used by regular homebuyers in a few crucial ways.
- With an owner builder construction loan, the lender will give you the money for the construction project in installments. This is different than a regular home loan, where you would get the money for the purchase all at once.
- Rather than a lump sum, you’ll get the money for the construction project in stages. This allows you to pay for materials and labor as you go instead of having to pay for everything all at once.
- You will need to prove you’re capable of completing a construction project on time and on-budget.
- Lenders will request a detailed and verified construction plan before approving your loan.
- Depending on whether you get a one-time close construction loan, the construction loan could be a short-term loan that will be due when the project is complete.
What is an owner builder construction loan?
If you’re planning to build your own home, you’re probably wondering how you’re going to finance it. After all, very few people have the cash on hand to pay for a construction project outright. Fortunately, there are home construction loans specifically for people who want to build their own homes. These loans, owner builder loans, work differently than regular home loans, so it’s important to understand how they work before you apply for one.
An owner builder construction loan is a loan that is given to a borrower to finance the construction of a home that they will be personally overseeing. In general, construction loans tend to have higher rates than traditional mortgages, as there is added risk inherent in a any construction project.
Owner builder loans a little different, and since they are somewhat niche, policies will differ significantly. You may pay less over the life of the loan and get a lower mortgage rate with an owner builder loan, but you might also have trouble obtaining the loan in the first place, as many lenders do not offer them because they are seen as very high risk. If you aren’t able to obtain an owner builder loan, you could explore a renovation loan, home equity loan or line of credit.
Owner builder construction loans can be used to finance the land purchase, as well as construction costs associated with building a new home. In some cases, the loan may also cover the costs of hiring contractors and subcontractors to help with the construction. The borrower will be responsible for making all of the construction decisions and will need to obtain the necessary permits and inspections in order to move forward with the project.
Because the borrower is assuming a great deal of risk, the lender will often require a higher down payment for an owner builder construction loan than they would for a traditional mortgage. The loan terms may also be shorter and the interest rate higher in order to offset the risk taken on by the lender.
Assuming all goes well, an owner builder construction loan can be an excellent way to finance the construction of a new home. The borrower will have complete control over the project and can often save money by doing some of the work themselves. However, because of the inherent risk involved, it is crucial to ensure that all of the necessary precautions are taken before beginning any construction project or taking out any loans.
What are owner builder loans used for?
Owner builder loans can be used for a variety of purposes, including the purchase of land, the construction of a new home, or the remodel of an existing home. Owner builders often use these loans to finance the construction of their dream home, which they will then live in once the construction is complete.
How do owner builder construction loans work?
Owner builder construction loans work by giving you the money for your construction project in stages. Typically, the lender will release the money to you in four installments.
The first installment is usually for the purchase of the land. The second installment is for the foundation. The third installment is for the framing, and the fourth is for the finishing touches, like painting and landscaping.
With an owner builder construction loan, you’ll have to pay for the project as you go. This payment schedule can be beneficial because it allows you to spread out the project’s cost over time.
What does the owner builder loan process look like?
Building your own home can be a gratifying experience. Not only do you get to see your dream home come to life before your very eyes, but you also get to save a significant amount of money in the process.
Of course, financing an owner-builder construction project can be a bit tricky. Most traditional lenders are wary of loaning money to someone who doesn’t have a professional general contractor on board. That’s where owner-builder construction loans come in.
The owner builder loan process is designed to provide financing for individuals who want to build their own homes. While the process can vary depending on the lender, there are some general steps that are typically followed. The first step is to submit a loan application, which will include information about the proposed construction project. The lender will then review the application and determine whether or not to approve the loan.
If approved, the loan will be disbursed in installments, which will be used to cover the costs of materials and labor. Once the home is completed, the owner builder will need to make arrangements for inspections and final approval from the lender before taking possession of the property.
Do you have to make payments on an owner-builder loan while you’re building?
The answer is yes – you will typically have to make payments on your construction loan while the home is being built. However, the good news is that these payments are usually interest-only, so you won’t have to pay off the principal balance of the loan while your construction project is underway.
Do you have to take out a traditional mortgage to pay off the construction loan?
Yes. Once the home is complete, the construction loan is due. However, you don’t necessarily need to pay off the entire loan amount all at once. You can take out a traditional mortgage to pay off the construction loan through a refinance if you’re planning to stay in the home, or put the house on the market and have the buyer take over the payments.
Can you get single close construction to permanent loans for owner builders?
Once construction is finished and the home is move-in ready, the property owner will need to take out a new mortgage to pay down the construction loan. If this is the case for your project, you’ll have two closings- one for the construction mortgage, as well as a closing for the permanent financing, also known as the construction take-out.
Single-close construction loans, like construction-to-permanent loans, are also available and very popular because they only require a single closing at the start of the project. This is a particularly valuable option in an era of rising interest rates, as you can lock in a rate with a single close loan at the start of your project rather than the end, letting you benefit from a lower total interest rate on the project and lots of money saved in interest payments over the total loan amount.
Typical down payment requirements for owner builder loans
It’s important to note that you’ll usually have to make a larger down payment with an owner builder construction loan than you would with a regular home loan. This is because the lender is taking on more risk with this type of loan.
The down payment for an owner builder construction loan is typically 20-25% of the total project cost. So, if you’re planning a $100,000 construction project, you would need to have $20,000-$25,000 for the down payment. Down payment requirements will fluctuate with your individual creditworthiness, the specifics of the construction project, your history in the construction space, and your choice of lender.
There is a workaround for a lower down payment with an FHA mortgage. You can use an FHA loan to purchase the lot, pay for construction, and finance the permanent mortgage with only 3.5% down and a single closing date at the start of the owner builder loan process.
However, there are a few downsides as well, including limits on the amount you can borrow. FHA loan limits will vary from zip code to zip code, and tend to be higher if you’re planning to build in a higher cost of living area. You can find out the FHA limit for your region on HUD.gov’s FHA Lookup Tool, here. You also want to keep in mind that all FHA loans, including FHA construction loans, require you to carry mortgage insurance- something that may not be the case with a conventional loan.
How long is the term for an owner builder loan?
When you take out an owner builder loan, the terms can vary depending on the lender. Some lenders may offer loans with terms as short as a year, while others may extend the loan for up to five years. The length of the loan term will also depend on the amount of money you borrow. If you only need a small loan to make some repairs, a shorter loan term may be sufficient. However, if you are planning a major renovation project, you may need a longer loan term in order to give yourself enough time to complete the work. Talk to your lender about their home builder loan options and find out what kind of terms they can offer you.
In most cases, with an owner builder loan, you’re looking at a term of 18 months or less- like a standard construction loan. Repayment during that time will typically consist of interest-only payments that go up and down based on market conditions over the life of the construction project.
Can you purchase land with an owner builder construction loan?
Yes! Like other types of construction loans, you can use an owner builder loan to finance an entire project, from acquisition of real estate to construction to move-in ready.
What fees are there for owner builder construction loans?
Similar to a standard mortgage, you are also responsible for closing fees for title company services, the appraisal, and other admin expenses. These costs come to about 2-6%, roughly the same as a traditional mortgage.
Owner builder construction loan eligibility
There are several requirements you’ll need to meet before qualifying for an owner builder construction loan.
What does an owner builder need to prove in order to be eligible?
1. A detailed construction plan. This should include a budget, timeline, and list of materials needed for the construction phase.
2. Proof of experience. Many lenders will require you to have experience in construction, either through previous projects or education.
3. A down payment. The majority of lenders will require a down payment of 20-25% of the total project cost.
4. A solid credit history. You’ll need to show a good credit score and that you’re financially responsible in order to get approved for an owner-builder construction loan. Lenders will also be looking for you to have an acceptable debt-to-income ratio.
5. Insurance. You’ll need to purchase construction insurance in order to protect your investment.
Does the owner have to be licensed?
Whether or not you need a license to get a loan for an owner build property depends on the state you’re in. In some states, a home builder can build their own home without a license as long as you follow the proper procedures and get the necessary permits.
However, in other states, you must have a contractor’s license in order to act as your own builder. If you’re not sure if you need a license, your best bet is to contact your state’s regulatory agency. They will be able to tell you what the requirements are in your state. Even if you don’t need a license, you will still need to get the proper permits before you start any construction.
What construction plans do you need to get approved for an owner builder loan?
As an owner builder, you’ll need to create detailed plans for the project, including all of the buildings, features, fixtures, and other construction variables. Things like the size of pipes, faucet types, lighting plans, materials used, and so on can be used by the lender to create a framework for the project- helping them manage risk and ensure they’re making a good loan.
After you’ve completed your construction specs, an appraiser hired by the lender will review the plans, determine the value of the underlying land and comparable properties, and calculate your appraised value and LTV, or “loan to value” ratio. Lenders use the LTV to determine how much you can borrow against the property/home.
Top 4 owner builder construction loan lenders
Here’s a list of the lenders that offer owner-builder construction loans that we found during our research. Not all of them are offered in all states, but we’re always expanding the list. If you know of a bank we missed, use the chat feature to let us know.
1. Bank of Utah
Bank of Utah got its start more than 65 years ago after being established by an Ogden business executive named Frank M. Browning. They now have more than $1 billion in assets and 17 full-service branches across Utah, which offer a wide variety of financial products, including construction loans.
We reached out to Bank of Utah to learn more about their construction loan product and here’s what we found:
- No payments due during construction
- In-house processing for a timely turnaround
- Owner-builder OK
- Same loan officer for both your construction loan and long-term home loan.
- Also offers lot loans for purchase of raw land
If you’re interested in connecting directly with a loan officer at Bank of Utah that specializes in construction loans, we can put you in touch with them directly.
2. Matanuska Valley Federal Credit Union
If you’re looking for a credit union to finance a construction loan, Matanuska Valley Federal Credit Union was chartered in 1948 by its 20 original members and has a long history serving the local community and can handle construction loans.
We reached out to Matanuska Valley Federal Credit Union to learn more about their construction loan. Here are the highlights:
- Provides construction loans and land/lot loans
- Available to owner-builders
- Property must be accessible by road
- Raw land loans only, although may include well, septic or utility improvements.
If you’re interested in connecting directly with a loan officer at Matanuska Valley Federal Credit Union that specializes in construction loans, we can put you in touch with them directly.
3. Peoples Bank (Washington)
Founded in 1920, Peoples Bank is a state bank in Washington that has a long history of helping residents of the state. They offer a construction loan program as part of their financial products.
We contacted Peoples Bank to learn more about their construction loan and here is what they said:
- Local decision making
- Owner-builder program
- Fixed and adjustable rate mortgage options
- Land financing OK
If you’re interested in connecting directly with a loan officer at Warsaw Federal that specializes in construction loans, we can put you in touch with them directly.
4. Timberland Bank
Timberland Bank opened its door more than 100 years ago in downtown Hoquiam, a timber town near the Washington coast. Started as a bank to fund loggers and the local town support loggers, Timberland Bank has grown into a significantly larger community bank today that is listed on NASDAQ and has assets of nearly $800 million. Not surprisingly, they have a construction loan product for Washington residents.
We contacted Timberland Bank to ask them for details about their construction loan. Here is what you need to know:
- Two-step construction loan provides financing for loans that exceed 80% loan-to-value.
- You pay interest only during the construction phase as funds are used.
- The construction term is 12 months.
- Your loan officer will assist you with converting to permanent financing.
- Owner-builder OK
- Partnered with Northwest Construction Control (NWCC) in order to provide timely and qualified inspections for your construction project.
If you’re interested in connecting directly with a loan officer at Timberland Bank that specializes in construction loans, we can put you in touch with them directly.
How to find an owner builder construction loan lender
Owner builder loans are a bit different than your typical home loan, so it’s important to find a lender who specializes in them and can offer guidance and support throughout the construction process. Here are a few tips you can use to find the right lender for you:
1. Do your research.
There are plenty of different lenders out there, so it’s important to do your research and find one that fits your needs. Ask your friends and family for recommendations, or look for online reviews.
2. Ask about interest rates.
Interest rates on owner builder construction loans can vary significantly, so it’s important to ask about loan rates before you choose a mortgage lender.
3. Get pre-approved.
Once you’ve found a lender you’re comfortable with, get pre-approved for a loan. They will check your credit score, calculate your monthly payments and this will give you a rough estimate of how much money you’ll be able to borrow.
4. Shop around.
Don’t just accept the first owner builder loan offer you receive. Shopping around and check out offers from different lenders to compare terms like interest rates and closing cost. This will help homeowners like you get the best deal possible.
If you’re looking to explore construction loan rates in other states, check out our national guide to construction loans and get started exploring all 50 states.
Joshua Holt is a licensed mortgage loan originator (NMLS #2306824) and founder of Biglaw Investor. His mortgage expertise lies in the areas of professional mortgage loans, particularly for lawyers, doctors and other high-income professionals. Prior to Biglaw Investor, Josh practiced private equity mergers & acquisition law for one of the largest law firms in the country.