How Do Soft Markets Affect Your Construction Loan Rates and Terms?

Construction loans, especially owner builder construction loans, are tricky enough when the mortgage industry and housing market is doing well. Things got a lot tougher, though, when lenders tagged certain counties around the nation as being areas of declining values.

These counties are known in the mortgage industry as soft markets, and they are having a big effect on your owner builder loan terms whether you recognize it or not. If an owner builder wants to build his home in a county that is listed as a soft market, then he should expect to have different financing guidelines than someone who is building in a county that isn’t tagged as being an area of declining home values.

It’s a tough pill to swallow for someone who is caught in this situation, but the guideline changes are based on prudent lending principles. The biggest change that an owner builder needs to be aware of is the requirement for a larger down payment than normal.

For instance, if you are building your new home in a soft market, then you can expect to make a down payment of at least 10%. If your normal owner builder construction loan guidelines were for a 10% down payment to begin with, then you may have to put an additional 10% down.

For example, if you are building a home with an appraised value of $ 250,000, and your loan terms called for a 10% down payment of $ 25,000, then you may find in a soft market area that you have to actually put 20% down, or $ 50,000. If you are getting an owner builder construction loan that typically requires no down payment, expect a 10% down payment for any construction in a soft market.

Why is this fair? Look at it from the lender’s point of view. They are putting up a lot of money for you to build a home in an area where loan values are decreasing. Therefore, in order for them to still be able to provide loans, they need borrowers to cover the possible value decrease by bringing some cash to the table.

By requiring owner builders to make an extra 10% down payment, lenders are protecting the loan-to-value ratios in the event that the house value decreases by the time you are done building it.

It helps to look at it this way: the revised guideline for soft markets is actually a good thing. The alternative is that a bank refuses to provide owner builder construction loans in any county that is tagged as a soft market. Then, you would not even get the chance to build your new home.

Therefore, if you are an owner builder who wants to build your new home in an area that is a soft market, at least you still have some options with your construction loans. If bringing an extra 10% down payment is not a possibility for you, do not fret too much. The really good news is that the list of soft market counties around the nation is drastically decreasing in size.

Though there are no guarantees, the mortgage industry is hopeful that the list will be shrunk to a bare minimum size in the next six months or less. Once home values are done dipping, the counties will no longer be considered soft markets. Once this happens, owner builder construction loans can go back to their standard guidelines and down payment requirements.

If you are an owner builder, you are probably wondering if your county is affected by these soft market designations. The only way to find out for sure is to speak directly to the construction lender who provides the owner builder loans. They will be able to tell you for sure if your county is on their soft market list.

In general, owner builder construction loans in Florida, California, and northern Virginia are the ones that are affected the most. However, there are still plenty of other states that have counties with soft markets.

Therefore, do your best to get this information up front from your owner builder loan officer. Don’t wait until it is too late to find out that you have to bring extra cash to the closing table.

Owner builders who fully understand the effects of building in a soft market can plan around the guideline revisions and still build their dream homes, saving tens of thousands of dollars in construction costs. But, an owner builder who does not pay attention to the realities of the new market conditions will be the one to suffer the consequences.

Chris Esposito provides owner builder construction loans to allow individuals to build their own homes without paying for a general contractor. To get more information, go to the Owner Builder 101 website at, or call (877) 876-3688.

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