Armchair Builder

Owner-Builder Construction Loans

What is a Construction Loan?

Building your dream home can be incredibly rewarding. But when you choose the owner-builder path, taking on the role of general contractor, it throws another layer of complexity onto an already intricate process. Securing a construction loan becomes vital for successfully financing your new home build.

Unlike a traditional mortgage, a construction loan is a short-term loan specifically designed to fund the construction process. Instead of receiving a lump sum, the lender disburses funds in stages, which are called “draws”.

Why Owner-Builders Need Construction Loans

Cash is King: If you have several hundred thousand dollars laying around, you may be able to self-fund your new home project. However, even if the owner-builder has this kind of money, it’s typically tied up in other investments.

Flexibility in Funding: Construction loans offer the flexibility for owner-builders to control their budget and adjust expenses as needed during the various phases of construction.

Managed Risk for Lenders: The staged disbursement of funds in a construction loan mitigates risk for the lender. They can ensure the project is progressing according to plan and their investment is secure.

Interest-Only Payments: During the construction phase, most loans have interest-only payments, providing some financial breathing room for owner-builders as the project unfolds.

Converting to a Permanent Mortgage:  Once the home is completed, most owner-builders will obtain a traditional mortgage to payback the construction loan.

Challenges of Obtaining a Construction Loan as an Owner-Builder

Securing a construction loan as an owner-builder can be more challenging than for someone hiring a licensed general contractor. Lenders may be hesitant due to the perceived increased risk of a non-professional managing the project. To improve your chances of approval, consider the following:

Detailed Plans and Budget: Present a meticulous construction plan and a realistic, itemized budget that covers materials, labor, and permits.

Proof of Experience: If you have previous construction or project management experience, highlight it. If not, take an owner builder class to learn the process.  This helps demonstrate your competency to the lender.

Contingency Plan: Show you’ve anticipated potential delays and cost overruns by including a contingency fund in your budget.

Larger Down Payment: Be prepared to offer a larger down payment (around 35% of the total project cost) to offset the lender’s risk.

Finding the Right Construction Loan

Look for lenders who specialize in owner-builder construction loans. They often understand the nuances of such projects.  Owner Builder Loans is a company that specializes in construction loans for those that want to build their own home without a general contractor.  The company is offering a limited time promotion for those that want to learn how to become their own general contractor.  If you complete our self-paced, online owner builder class, and then receive a construction loan through their company, they will reimburse you for the cost of course enrollment ($249).  But hurry as this is a limited-time promotion that won’t last forever. 

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