Owner builder construction loans have not been immune to all of the changes that have occurred over the last couple of years in the mortgage industry. With all of the turbulence, a borrower must ask more questions now than ever before. So, if you want to be an owner builder, here is a list of ten questions you need to ask about your construction loan.
– Question #1. Is there a requirement for a general contractor? What about a site supervisor or project manager? If the loan is truly an owner builder construction loan, then you won’t have to hire any general contractor. In fact, the whole point of the program should be to allow you to act as your own general contractor and manage the process yourself. That is how you will earn 15% to 35% sweat equity in your home.
– Question #2. Are there any consulting fees? The answer to this question should be a resounding no. Unfortunately, there are some owner builder programs that require you to pay financing fees plus extra consulting fees for the right to build your home. Make sure you find a program that charges simply financing fees like other mortgages. Those financing fees will of course be higher than a simple purchase or refinance loan. But, you shouldn’t have to pay consulting fees on top of them.
– Question #3. How many closings will there be? Some construction loans require you to go through a closing prior to construction, then a second closing once the home is complete. You want to find a true owner builder construction-to-permanent loan that wraps the construction and permanent financing into a one-time-closing.
– Question #4. When can the permanent loan interest rate be locked in? It will be very advantageous to you if you can find an owner builder loan that allows you to lock your permanent mortgage rate prior to starting construction. This will serve as a nice bit of protection in such a tremulous market.
– Question #5. Who controls the draws? During a construction loan, you will need to borrow money in the form of draws to pay for different steps of construction along the way. You want to avoid any program that has the sub-contractors deciding when to take the money. Imagine a plumber deciding he should be paid before you are fully satisfied with the work he did. That can quickly become a nightmare. Instead, you want your owner builder program to pay money to you and/or the sub-contractors only when you are satisfied that the work was done to your standards and local code.
– Question #6. What are the requirements for hiring various sub-contractors? Can you hire whomever you wish? Or, is there a list of contractors from which you must choose? If you want to save as much money during construction as possible, you will be allowed to hire whomever you choose for construction. Otherwise, what’s the point of being an owner builder and managing the project yourself? If you are forced to choose contractors from a pre-approved list, you won’t have the chance to take advantage of the best deals on labor and materials.
– Question #7. Is the owner builder construction loan based on appraised value of my property, or is it based on the cost to build? As an owner builder, your cost of construction will be much lower than the finished value of your home. Therefore, you want a loan that will lend money based on the value of the property. This way, you will have lower interest rates and much lower down payment requirements. For example, a loan that will lend up to 80% of the value of your home should be able to cover all of your costs, leaving you with no down payment. But, if the loan only lends 80% of the project costs, then you have to fork over the remaining 20% of the costs up front at closing.
– Question #8. How does interest accrue during construction? Every construction loan, even owner builder loans, requires a budget prior to starting the project. You want a loan that will allow you to pad your budget to be safe. You can only do this properly, though, if the program is set to accrue interest only on the amount of funds that you actually borrow (ie, draw) during construction. In this way, you won’t penalize yourself by padding your budget. If the construction loan were set up to accrue interest on the initial budget numbers, you would be paying interest on money you might not actually borrow. That would be a shame when there are programs available that accrue interest only when you actually draw the money during construction.
– Question #9. Do you have to make payments during construction? As discussed in question 8 above, interest should only accrue on what you borrow during construction. If the program is flexible, you will also have the option of delaying payment on that interest until the home is completed. This is typically achieved through a feature called an Interest Reserve. You should ask your loan officer about it if you want to avoid making mortgage payments while you build.
– Question #10. Does the program offer support before and during construction? The owner builder loan program should provide experienced, knowledgeable people who are available to answer questions and concerns while you are planning your project. And, they should be there for you during construction until the day you move into your new home.
For an owner builder in today’s financing climate, a specialized construction loan is vital to the success of the construction project. Just make sure you get all of your questions answered before you start building. Owner builder construction loans should at least meet your criteria from these ten questions above.
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