What is an owner builder construction loan?
Owner builder loans are made for borrowers who are building their own home. For these loans, the owner may be acting as the general contractor for the project or may be a professional home builder themselves. Many lenders are leery of these loans because they find it risky to work with anyone but a licensed general contractor with an established reputation for quality. Other lenders will structure the loans with clear incremental completion dates to ensure the project is well-managed, under budget and on time. This page mostly pertains to residential 1-4 unit construction financing.
Once the lender approves the borrower taking out the owner builder finance loan, detailed plans of the project need to be drawn up. Creating a list that identifies and prioritizes every piece of the project, from the size of the floor drain in the garage to the shape and style of the shingles on the roof, gives the lender a framework they can use to keep the borrower and project in line. Once done, an appraiser reviews all of the specifications, considers the value of the land, the finished product and similar homes in the neighborhood to make an estimated appraised value. This is the initial amount from which the lender calculates LTV.
Down payments can vary for this type of loan. If the lot is already owned, it can be part of the equity (down payment) calculation, with the lender financing the remainder of the project. Lenders typically require 20% to 25% of the eventual completed value of the residence must be put down. However, an FHA mortgage allows the owner builder to finance purchasing the lot, constructing the home and the permanent mortgage with 3.5% down, with only one closing at the beginning of the process.
Construction loans include short-term repayment windows of generally 18 months or less. Repayment is generally interest-only payments that fluctuate with the market as construction progresses. At the end of the construction, when the home is ready for occupancy, the owner builder will need a new mortgage to pay off the construction loan. This scenario requires two closings, one for the construction mortgage and one for the permanent financing (construction take-out). The single-close construction loan is popular because it only has one closing-at the beginning of the project. The borrower should know that interest rates fluctuate and consider whether to take an interest rate at the beginning, only to be stuck with it in a falling interest rate environment.
What are some common construction loan purposes?
- All-in-one construction to permanent loan. One loan covers acquisition, construction and the 30-year repayment schedule
- Construction completion. Funding was inadequate to finish the project
- Construction take-out is the 30-year mortgage that pays off the construction loan
- Ground-up construction where the builder already owns the land for his house
- Lot and construction. One mortgage loan to buy the lot and do the construction project
- Existing structure rehab/renovation/remodel construction loans
What are some examples of owner builder mortgage loans?
- FHA 203(k) allows the borrower to tack on up to $35,000 to be used repairing or renovating the newly purchased home.
- Equity driven private lender mortgage up to 65% LTV
- Owner builder fix and flip loans at 90% LTC and 70% LTV
- Licensed builder owners for 6, 9 or 12 months (with extensions available) up to 75% LTV and up to 90% LTC
- Amounts up to $3,000,000 and up to a 24-month term
- In-house draw administration, one-time close, Conventional at 95% LTV, VA at 100% and FHA at 96.5
- 30-year fixed with one close, no credit requalifying, stick-built, manufactured or modular
- Up to 50% of land value and 100% of construction costs
How do I find an owner builder construction lender?
Whether you need an owner builder construction loan in California, Idaho, Utah or any other state, use LenderSearch.com and select “Homeowner is the Builder” in the Borrower field. Enter the rest of your details, such as the loan purpose and press search. You will get results that identify construction loan lenders suitable for the owner builder.