Owner Builder Construction Loans

Can I get a loan to build a house myself?

It is possible to get finance to build your own house but it differs in many ways from the traditional mortgage. The vast majority of house mortgages are long-term loans that cover the cost of the house purchase. An owner-builder construction loan is a short-term loan for the purchase of the land and construction of your new home. The good news is there are construction loans that can be converted to regular mortgages once the property is completed.

What is an owner-builder loan?

An owner-builder loan gives you the cash you need to buy the land, cover the costs of materials, pay contractors, and all the ancillary costs of building a house. The big difference is that until the house is finished, there is no real estate to be collateral, so the lender is taking a bigger risk than most mortgage companies.

Construction loans are normally governed by a draw schedule that ensures each part of the build is completed before more money is lent. The owner-builder is not simply given a lump sum – that is too great a risk for the lender. Rather, after each stage of construction is finished and inspected to make certain the work is up to standard, another tranche of money is made available for the next part of the project.

Owner-builder lenders will insist you work with highly qualified and experienced contractors before they agree to finance your house.

What does a construction loan cover?

• Purchase of the land
• Design costs and architect’s plans
• Materials for construction
• Payments to the contractors
• Permits and licenses
• Insurance
• Reserves if you go over budget

Remember, you will need a plan in place for a long-term loan to repay the owner builder loan on completion of the project.

What are the different types of owner-builder loans?

FHA construction loan

If you have a less than perfect credit score and might struggle to find sufficient money for the down payment, you may want to apply for a loan backed by the FHA. Rather than the usual 20% contribution required by most construction loan providers an FHA loan needs just 3.5%.

The other major benefits of FHA loans are that you don’t have to make payments during construction and they are designed as construction-to-permanent loans so there is just a single closing fee.

VA construction loan

If you are or have been part of the U.S. military family you may qualify for a VA construction loan. They guarantee both construction-to-permanent loans and two-time close loans. Like an FHA loan, no repayments are required during the build but the time taken to construct the house will be taken off the repayment period. You have to use a contractor approved by the VA. Sometimes VA loans can be for 100% and need no downpayment.

Construction-to-permanent loan

If you take out a C2P, at the end of construction, the outstanding amount is converted into a regular mortgage with low interest rates and a generous term. This simplifies the process and means you only have to pay one closing fee.

Owner-builder construction loan

Owner-builder construction loans are available for professional builders who decide to build a home for themselves and you need to be licensed, insured, and have a good trading history. You will also need to meet the personal requirements of good credit and a low debt-to-income ratio, and be able to come up with the down payment. These loans are available from private lenders and through the FHA, though not the VA.

One-time close construction loan

A one-time close construction loan is any loan that, as with a VA loan, on completion of the house, morphs into a standard mortgage so you only incur one set of closing fees. Otherwise, you may have the extra hassle of having one loan to build the house and organizing another long-term loan to pay off the first, each having a closing cost.

Is a construction loan harder to get than a mortgage?

If you approach the right lender, have a firm financial standing, and get a proven contractor on board, there is no reason why a construction loan should be any more difficult to get than a mortgage. Just be aware that there are relatively few lenders offering these loans compared to a normal house mortgage.

Will banks lend to owner-builders?

Because there is a history of owner-builders going behind on completion date and/or over budget, traditional banks have become loath to lend for such projects. They look much more favorably on those who are licensed builders and have a history of successful construction projects.

How do you choose an owner-builder lender?

• Make certain they provide the sort of owner builder construction loan you want
• Ask about interest charges
• If you have already bought the plot of land, find out if its value can be used as part of the down payment
• Get details of the draw schedule so that you can plan correctly
• Find out what the closing fees are likely to be

We can’t make specific recommendations as we don’t offer owner builder construction loans through our lending partners. However, if you decide to renovate a property rather than build from scratch, or just need a conventional mortgage, we can help you. You can compare options from all our lenders in just a few minutes – without impact on your credit.