Holiday Shopping for Owner Builder Loans: The Features Your Financing Must Have
Happy Holidays. It’s that time of year again. Holiday season not only means shopping for stocking stuffers. It’s also the time of year when people start planning their construction projects to be able to begin building in the spring. Here’s a list of features your owner builder construction loan must have to make your shopping easier.
There are a wide variety of construction loan choices out there. And many of them are woefully inadequate for most people – especially if you want to act as your own general contractor (known as owner builder construction).
Local banks tend to be very conservative and will not even consider lending their money unless you fit exactly into their guidelines. This typically means having a fixed price contract with a licensed and approved builder, selling your current home prior to qualifying, and even making a large down payment or owning the land first.
Occasionally, a local bank will give you permission to be an owner builder, if you jump through enough hoops for them. They may require an extra large down payment or that you own the land free and clear before they lend you the money to build. In the end, most local bank’s construction loan programs will have one or more restrictions that make their programs unusable, more restrictive and even more expensive than a good alternative.
As an owner builder, your search for a construction loan should be focused on finding the loan features that will best fit your scenario. Finding this type of program gives you the greatest chance of success and your best opportunity to save money on your project.
Within the world of owner builder construction loans, there are only a handful of options that make sense. Some of the features that should be most important are:
o Ability to be your own contractor without needing to make a large down payment – if any at all. “Large” means anything more than 5% for a conventional size loan. Even with a smaller down payment, the loan guidelines should have no requirement for a general contractor.
o No “consulting fees” or monthly “administrative” fees charged to you just for doing a loan. Please understand, you need to expect to pay for an owner builder loan in the form of origination or discount fees, but you should not also need to pay a consulting fee.
o No requirement to sell your current home before you can qualify for the new construction loan. Many lenders will force you to sell your current home before you start building the new one, meaning you will be forced to move twice in a short time just to get the loan.
o No upfront or “application” fees. Avoid any lender who requires any kind of upfront fee or “deposit” of any kind. You shouldn’t have to pay anything to the lender until the loan closes.
o Easy draw administration. This means easy for you, the owner builder, not the bank or your sub-contractors. After all, if you can’t get access to and control your money, all the other terms really don’t matter.
o One-Time closing. The best construction loans allow you to close only once for both your construction funds and your permanent mortgage. This will save you several thousand dollars in the long run.
o Long term rate lock. Look for an owner builder construction loan that will allow you to lock in your permanent rate before you begin building. This will give you a nice bit of protection against rate fluctuations while you build.
o A staff of professionals who understand both construction and construction financing. Ask the person you are speaking with how many homes they have built themselves as an owner builder. If you are dealing with a loan officer who has never built his or her own home and cannot speak to you from specific experience, you should look elsewhere.
The importance of working with knowledgeable professionals cannot be stressed enough.
Half of the battle is learning to ask the right questions.
The smart shopper shops for loan features, not just interest rates – especially when looking for a loan as specialized as owner builder construction loans. The features that an owner builder needs are not necessarily the same as those a borrower hiring a general contractor needs. Refer back to the list of important features above as you examine different owner builder loan programs this holiday season.