Have you recently bought a sweet piece of land away from the bustle of the city? Do you want to build your dream house on it? Do you want to take the responsibility all by yourself? We have all come across builders and contractors in our lives at one point or another. We have seen them at work. We have all seen how a barren land transforms into a cozy home or a palatial multi-storied abode. However, only a few of us have undertaken the construction of our own homes. Most of us are clueless about the fund requirements, sourcing of raw materials and obtaining permits.
What should you know before becoming an owner-builder?
Building a house is a costly project. Many future homeowners like to think that they can use their life’s savings for constructing their new dwelling, but is that a risk you are willing to take? Moving into a new place is expensive, but that is not the end of all expenses. There are always bills to pay and taxes to file. So moving into your new home empty-handed may not be the best idea ever. Instead of using up your savings or retirement fund during the construction, you should think about getting an owner-builder construction loan.
The responsibility of constructing your own home from scratch is daunting. Apart from enthusiasm, energy and lots of time, you will require some knowledge of construction. Skills are essential at every step of the process. Experience and expertise will tell you which raw material you should use, and which brands offer the best quality. Handling a large project like this one calls for the thorough command of one’s building skills, management skills, and resourcefulness. It is true that becoming an owner-builder can save you over 40% of the total building cost and you can readily convert the construction manager or contractor’s fees into equity. However, finding a loan that covers your interests from a conventional lender is going to be extremely challenging.
Why is getting an owner-builder loan difficult?
A bank will always look for someone who is either a professional contractor or is working with one for sanctioning a similar loan. If you approach a traditional lending institution with a loan application, they might try to convince you to find a subcontractor or manager for hire before they lend the capital. At the same time, these institutions expect the owner-builders to pay for the raw materials in cash so that they can apply for a refund later on. However, for an aspiring homeowner, already working on a tight budget, it may be impossible to dish out the cash upfront to pay the vendors. Only the specialized owner builder loans are good enough to cover these up-front costs and see your project through to the end.
What should you have to apply for an owner builder construction loan?
As an owner-builder, you need to meet a few requirements before you can apply for the loans. Here are some of the small but necessary duties you have to meet –
- Getting the required building permits from the city offices
- Create a blueprint and a constructive building plan
- Making a plan for the disbursement of funds
- Finding the right source of raw material at competitive prices
Since you will be working with private lenders, you must remember that each one might have one or two requirements that are unique. While you can find them on the company’s website, you should try to speak with their loan officials for accurate details. A right lender always has excellent customer service to inform and educate potential lenders.
An owner-builder construction loan has eligibility criteria similar to that of other conventional loans. Apart from the documents and permits we have mentioned above, you will also need –
- Proof of stable income
- A good or decent credit score
- A history of loan payments or cash reserves
- Debt-to-income ratio
Many lenders allow land equity. They are also likely to ask for a down payment of up to 30% of the loan amount. Private loans for owner-builders usually bear a higher risk than conventional home loans and mortgage loans. So, you can expect a slightly higher interest rate than traditional loans. That is also the reason banks and financial institutions welcome the participation of a professional with a certification in construction in the building project.
Does becoming an owner-builder involve construction work as well?
Most people do not know this but becoming an owner-builder does not require you to pick up the hammer at all times. You can, of course, help the contractors to save time and money, but most of the time you will have to obtain construction materials. At the same time, it will be your responsibility to judge the quality of material and the types of the same the builders are using to make your home. So, apart from experience in construction, you should think about acquiring smart budgeting skills, and excellent management skills. There might be times when you have to manage more than one team of subcontractors. Your leadership skill will influence the outcome of such situations and the quality of the building project.
Why should you take out the owner-builder loan for your house?
The most significant advantage of becoming an owner-builder is that you will have complete control over your project. As long as you have the managerial skills, you should be able to maintain a decent pace of the project and keep a tab of the expenses too. Another significant benefit of taking out an owner-builder loan is creating instant equity. You can refinance, apply for a second loan or sell it once the construction work is complete. That turns this type of credit into an investment with fast returns. Moreover, without a general contractor on your payroll, your monthly mortgage rate goes down and budgeting your finances for your family in your new dwelling becomes smooth.