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20 Do's and Don'ts of Owner Builder Construction Loans

Sep 6, 2008
If you are considering being an owner builder and managing the construction project without hiring a general contractor when you build your own home, then you need to go into the process as prepared as possible. These twenty tips will prove invaluable when shopping for and completing your owner builder construction loan.

1. Owner Builder Don't:

Don't rush through your planning phase in an effort to get to the actual construction as quickly as possible. Many an owner builder before you has made this mistake only to run out of money with a half-built home.

2. Owner Builder Do:

Do understand that the planning and financing phase is just as important as the actual construction phase. The battle can be won or lost before the first nail is ever hammered.

3. Owner Builder Don't:

Don't rely on a cost estimator to put together your construction budget. They will not be accurate enough.

4. Owner Builder Do:

Do take the time you need to put a solid budget together, based on actual bids and quotes from local sub-contractors and material providers. Make sure you based these bids and quotes on your actual blueprints.

5. Owner Builder Don't:

Don't shop for an owner builder construction loan based solely on the interest rate during construction. Short term, interest-only construction rates will only create a minor variation to your overall costs, because they only apply for the nine or twelve months that you build.

6. Owner Builder Do:

Do make sure your owner builder loan accrues interest based only on what you actually borrow during construction. This way you can pad your budget going into construction without having to pay interest on it.

7. Owner Builder Don't:

Don't allow the seller of the land to force you into a purchase agreement that expires in one month. Your lot contract will expire before your loan closes and funds.

8. Owner Builder Do:

Do explain to the seller of the land that you are wrapping the purchase into your construction loan and need at least two months (or more) on the contract in order to finalize blueprints, complete a full budget and get the file through underwriting.

9. Owner Builder Don't:

Don't try to build the biggest house in the neighborhood. Your loan's appraisal will most likely be inadequate to get the file through underwriting, because there won't be any comparable properties in your neighborhood.

10. Owner Builder Do:

Do understand the construction appraisal process and requirements before you finalize your house plans and/or select your land. If you can't get a solid appraisal, you can't get an owner builder construction loan.

11. Owner Builder Don't:

Don't settle for a construction loan that has two closings - one for construction and one for the modification the permanent loan once you're done building. This extra closing will cost you time, money, and headaches.

12. Owner Builder Do:

Do find a loan that has a single closing to cover the land purchase, construction phase, and conversion to permanent financing. You may see the term construction-to-permanent or one-time-closing.

13. Owner Builder Don't:

Don't try to secure financing with poor credit nowadays. Construction loans are stricter than regular purchase loans or refinance loans, so it is hard to find any financing for poor credit borrowers right now, especially if you want to be an owner builder.

14. Owner Builder Do:

Do make sure your credit score is at least above 620 with a few open, healthy accounts. For your best chances at financing, get your score above 700. Talk to your loan officer for credit restoration ideas if needed.

15. Owner Builder Don't:

Don't start building your new home without a plan for selling your current home.

16. Owner Builder Do:

Do consider listing your current home for sale right from the start of construction. Your new home may not be ready for another twelve months, but that gives you plenty of time to consider offers and prepare for the sale of the current home.

17. Owner Builder Don't:

Don't start construction until your owner builder loan has closed. Depending on the state and/or county in which you live, you may run into issues with title insurance. No title insurance means no financing.

18. Owner Builder Do:

Do speak to your loan officer and local title companies if you absolutely have to begin building prior to the loan closing date.

19. Owner Builder Don't:

Don't hurt your credit score while you build your own house by running up credit cards or missing payments due to being strapped for cash.

20. Owner Builder Do:

Do look for a construction loan that has features to keep your cash in your pocket: minimal down payment requirements, an interest reserve feature to limit mortgage payments while you build, a construction contingency to protect you from under-budgeting, and unlimited draws while you build. These types of features will prevent you from spending all of your own cash, which leads people to severely damage their credit scores while they build.

If you want to build your own house, following these twenty tips will keep you one step ahead of the game. If you want more assistance, look to your owner builder construction loan representative for guidance and help with anything related to the planning or financing of your project.
About the Author
Chris Esposito specializes in owner builder construction loans through the Owner Builder 101 program. If you want to build your own home without paying the fees of a GC, start by visiting Owner Builder 101 for information on financing, planning and construction. Or, call (877) 876-3688.
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