Owner Builder Construction Loans

This Page Was Last Updated: October 20, 2022
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What You Should Know

  • Allow you to build a home without hiring a general manager.
  • You can pay yourself for labor or hire sub-contractors.
  • You receive payments in installments, known as draws.
  • You must be an experienced and licensed contractor to qualify.
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Owner-builder construction loans, also known as "self-build construction loans" can be an excellent option for those who want to take on the challenge of building their own home. As the name suggests, self-build construction loans are designed for people planning to build their own homes.

Owner builders don't typically build the home themself but act as general managers and hire sub-contractors. However, they have the option to pay themselves for their own labor. This type of loan can act as a land loan and finance the construction costs associated with building the property.

Many individuals build their own homes because they want to have complete control over the design and construction. Self-build loans give borrowers the flexibility to manage the construction of their own homes while still receiving financing from a lender. This article will thoroughly explain the lending product and how to get one. It concludes with the varying laws by popular states.

Owner-Builder Construction Loan Interest Rate:6.5% to 12%

Owner Builder Construction Loans Explained

BenefitsDisadvantages
  • Control over the design and construction process
  • Potential to save money by hiring sub-contractors or paying yourself for labor.
  • More initial home equity.
  • More responsibility for managing the construction process.
  • Higher risk for lenders, leading to higher interest rates and stricter eligibility requirements.
  • May have difficulty finding a lender that offers owner-builder loans.

Owner builder loans are a type of construction loan. The primary difference between the two loans is that the borrower plans to build the house rather than contract the work to a professional builder. To get an owner-builder loan, you typically must be a licensed contractor and meet all eligibility requirements explained below.

The loan functions as a construction loan would. You won't receive the total mortgage amount up front. Instead, you will receive the loan installments as you accomplish building milestones. The installments are known as draws, and you will receive them upon completing a pre-determined milestone. For example, you may receive 20% of the total loan upfront and the next 30% when the foundation is laid. You can use a construction loan calculator to estimate your monthly payments.

The loan typically lasts for one year with extension fees. During this phase, you need to make interest-only payments. At the end of the term, you will need to refinance into a mortgage, such as a type of conventional loan. After refinancing, you will make regular mortgage payments of principal and interest. However, selling the house can also pay off the construction loan.

Owner Builder Loan Requirements

There are a few requirements you'll have to meet before you qualify for an owner-builder loan:

  • Be a licensed builder with experience in homes.
  • Have builder's insurance.
  • Have detailed building plans & specifications.
  • Contribute a 20% to 30% down payment.
  • Have a 680 minimum credit score.

These are the basic requirements. Depending on your lender, additional requirements such as cash reserves or a maximum debt-to-income (DTI) ratio may be added. For example, some lenders require 4-6 months of construction costs retained as a cash reserve. Additionally, some lenders may require your DTI to remain below 41%. If you meet the above requirements, you should be eligible for an owner-builder construction loan. The next step is to start shopping around for the best deal.

Owner-Builder Responsibilities

An owner-builder is responsible for managing the construction of their own home. This includes:

  • Hiring and overseeing sub-contractors.
  • Ordering materials.
  • Ensuring that the work meets all local building codes.

Since self-builders essentially act as their general contractors, they must be well-organized and understand the construction process well. If you're unsure whether you're up for being an owner-builder, you can always work with an on-site project manager or construction management company.

On-Site Project Manager

You can hire an on-site manager to oversee construction. They are professional builders who supervise the construction of your home. They are responsible for hiring and managing sub-contractors, ordering materials, and ensuring that the work meets all local building codes.

Working with an on-site project manager can be a good option for people who want to build their own homes but don't want the hassle of managing the construction process themselves.

Construction Management Company

Another option is hiring a construction management company. These companies specialize in overseeing the construction of homes. They perform all the tasks of an on-site project manager and will work with you to develop a building plan and budget. As a result, they are costlier than an on-site manager. However, working with a management company may help you qualify for a loan if you aren't a licensed contractor.

Who Offers Owner-Builder Construction Loans

This section will discuss popular owner-builder lenders. When comparing loans, there are a few key things you need to look at:

  • The interest rate
  • The loan term
  • The fees
  • Acceptance requirements

Normandy Self Build / Owner Build Loans

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Normandy's owner-builder loan allows you to become a general contractor. They offer loan amounts from $95,000 to $5,000,000. Additionally, you can finance up to 85% of construction costs or 90% of your home's appraised value. You can also purchase land through this loan with a minimum 25% down payment.

The loan begins with a 12-month interest-only period. However, there are extensions available. Normandy's loans are widely available across the United States for owner-occupied and non-owner-occupied properties.

Mountain America Home Construction Loans

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Mountain America's home construction loan provides regular, and construction to permanent (C2P) loans for owner builders. Their program offers up to 95% loan to value.

What sets them apart is the ability to lock in your rate after construction has started. Additionally, they offer a two-step home construction loan. Otherwise known as a C2P loan, this product allows you to transition into a regular mortgage when construction is finished automatically.

Owner Builder Loans, LLC

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As the name suggests, Owner Builder Loans specializes in self-build loans. The Arizona-based company structures the loan with a 12-month term of interest-only payments. However, there is the added benefit of no pre-payment penalty. This is especially useful to developers who wish to sell the home before construction is finished.

They offer a maximum loan amount of $500,000. Some additional benefits include no restrictions on your material suppliers or sub-contractors. They provide significant flexibility.

Self-Build Construction Loans Process

The process for obtaining a self-build loan is similar to the process for obtaining a traditional mortgage. The borrower will first need to find a lender that offers self-build loans and then apply for financing.

The lender will then appraise the property's value and the construction project's cost. The loan amount will be based on these two factors. The borrower will then need to make a down payment and monthly payments on the loan.

The construction process will need to be managed by the borrower. This includes hiring contractors, ordering materials, and supervising the work. Throughout construction, the lender will provide the borrower with draws upon the successful completion of predetermined milestones. Once the building is complete, the borrower will need to get the property appraised again. The loan will then be converted into a traditional mortgage.

The Cost of Building Your Own Home

The cost of building your own home will depend on several factors, including:

  • the size and location of the property
  • the cost of materials
  • the cost of labor
  • local building codes and regulations.

Building a home in a rural area is generally cheaper than in an urban area. This is because land and labor are typically more affordable in rural areas. Building a smaller home will also save you money on construction costs. Below you can the cost of building a home in the most inquired states.

StateAverage Building Cost
Florida$240,000 – $350,000
Arizona$200,000 – $625,000
Georgia$100,000 – $400,000
North Carolina$320,000 – $450,000
Texas$235,000 – $660,000
Colorado$300,000 – $500,000
Michigan$225,000 – $265,000
Pennsylvania$345,000 – $450,000
Source: HomeAdvisor

Owner Builder Loan Alternatives

An owner-builder loan is simply a type of mortgage loan which finances your construction. To qualify, you must prove to be an experienced and licensed contractor. If you aren't a licensed contractor or can't qualify for an owner-builder loan, the following options can help. A benefit of these options is that you don't need to pass construction milestones to receive more funding. You can lend to yourself as necessary. While these options aren't explicitly designed for owner-builders, they'll help you build your own home.

Home Equity Loans

If you already own a home with sufficient home equity, you can borrow against it to build a new home. Fortunately, this is a popular process, so many lending products are available. These loans have low interest rates because your home secures them. This means your primary residence could be foreclosed for consistently missing payments.

In most cases, you can borrow a combined loan-to-value (CLTV) of 85%. For example, if you owned a $1 million home with a $500,000 balance, your LTV would be 50%. As a result, you could borrow an additional 35%, or $350,000. Some popular home equity products include

  • HELOC: A line of credit that can be borrowed against as needed. These loans typically have a low interest rate and a 10-year interest-only payment period. As a result, you won't have significant time pressure to complete the home within one year.
  • Cash-out refinance: Refinance your current mortgage for a higher amount and receive the difference in cash to build your home. The process will affect your primary mortgage interest rate. These loans often come with low interest rates and longer repayment terms, making them more affordable. However, there is no interest-only period with this option. You will immediately be required to make larger mortgage payments.
  • Second mortgage: Similar to a cash-out refinance, the loan is in addition to your current mortgage. The second mortgage won't affect your primary interest rate, and you'll pay a blended interest rate. However, you'll have two separate mortgage payments to make every month.

Personal Line of Credit

A personal line of credit works similarly to a HELOC. You receive a balance with a maximum withdrawal limit. You can withdraw funds as needed to finance the construction of your home. The interest rates are typically higher than a HELOC because it is unsecured debt but still lower than traditional credit cards or personal loans.

Some personal lines of credit have an interest-only phase. This allows you to make minimum payments while your home is built. At the end of construction, you can pay off the line of credit by refinancing the balance into a mortgage or selling the home. There are two variations to a personal line of credit

  • Unsecured: These have no collateral but a higher interest rate. However, missing payments will dramatically decrease your credit score.
  • Secured: You receive a lower interest rate by collateralizing a personal asset. For example, you can secure your car. This means your lender can repossess your car if you frequently miss payments.

Credit Card

A credit card is a type of unsecured personal line of credit. They have no collateral but extremely high interest rates, around 22% annual percentage rate (APR). While they are the most expensive financing option on this list, they are the easiest to qualify for. While the standard way to use a credit card requires a payment terminal, not all sub-contractors accept this payment method.

You can withdraw cash from your credit card using a cash advance if this is the case. However, this usually comes with additional fees, such as a cash advance fee and immediate interest charges. If you can pay through a credit terminal, you will benefit from a 20-day interest-free period.

Due to high credit card interest rates, a common strategy is switching to a balance transfer card. This allows you to transfer your existing credit card balance onto a new card with a low or 0% interest rate for a limited time. This will enable you to pay off the balance without accruing much interest. Ideally, construction finishes before the promotional balance transfer period ends. This will allow you to sell the house or refinance into a mortgage before the high interest period begins.

Construction Loans

Instead of building the home yourself, you can receive a construction loan and hire a general manager. Construction loans release funds to the general manager as construction milestones are completed. They often have a 12-month time frame and require you to refinance into a mortgage at the end of construction.

Although this option isn't for owner-builders, it is still worth mentioning for those unable to qualify for an owner-builder loan or who don't want to take on the added responsibility. While conventional construction loans require at least a 20% down payment, there are governmental programs available with minimum down payments ranging from 0% to 3.5%.

  • FHA Construction Loan: Available for owner-occupied homes, this government program only requires a 3.5% down payment and offers flexible credit requirements.
  • VA Construction Loan: Only available to veterans, this program has 0% down payment requirements and flexible credit guidelines.
  • USDA Construction Loans: The USDA offers 100% financing for construction loans in rural areas for low to moderate-income families.
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