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Understanding The Closing Costs For An Owner Builder Construction Loan
After an owner builder navigates his way through the labyrinth of qualifying, it will be time to close on the loan. This is essentially where you sign a huge stack of documents that you will barely skim, and hardly comprehend anyway.
Basically, this is where the owner builder loan promises to give you the money, and you promise to repay it. Seems simple - so why is it usually a hundred pages long?
An owner builder is usually free to choose any closing agent for the closing. In most states, owner builders can choose either an attorney or a title company to perform this function.
Once you sign all the documents, the closing agent still must record them with the county registrar, making the owner builder construction loan official. This is usually the day after your signing.
During construction, as an owner builder requests specific loan draws, the lender will most likely request the closing agent to do periodic updates of the title to make sure no liens have been filed to date.
A few years ago, all of the good owner builder construction loans were one-time-close, construction to permanent loans. This meant that you would not have to go through the pains of a second loan closing once your owner builder construction was complete.
However, nowadays, that is much harder to find. Today, an owner builder will most likely have to pay the price of a second loan closing upon completion of the home. It's the price you pay for being an owner builder, and it should be worth it if you properly plan and execute your project, saving a ton of money by cutting out the costs of a general contractor.
Owner builder loan closing costs typically consist of three components: broker/lender fees, loan fees, and third party fees. Remember two things about closing costs when considering owner builder financing.
First, closing costs for construction loans, in general, and owner builder construction loans, especially, are going to be slightly higher than costs for a plain purchase or refinance mortgage. Accept this and shop for the loan that best fits your needs. Do not waste your time looking for an owner builder construction loan that has the same terms as the refinance loan you did two years ago. Do not try to compare apples to pineapples.
Second, just because an owner builder construction loan has slightly higher costs does not mean that it is not a great deal. Remember the big picture. You are considering being your own contractor to build the exact home of your dreams and save tens of thousands of dollars doing so.
If your research shows that you can save, for example, $60,000 by being an owner builder, is it no longer a great deal if you only save $55,000? How about $50,000? $45,000? Recognize that you are still saving a lot of cash while building your dream home, regardless of the slightly higher financing fees that come with owner builder loans.
Mortgage brokers earn their pay on owner builder loans by charging origination fees. This is a percentage, called "points," of the loan amount. One point equals one percent of the loan amount. By charging an origination fee, the broker gives you access to a lender's wholesale rates. The broker is also able to represent you and your best interests by offering access to a variety of loan programs.
Working directly with a lender might also be an option. Direct lenders are typically compensated the same way as a broker; by charging points.
Perhaps the best option is working with an organization that has expertise in owner builder loans, that is a direct lender, and that also has the option of acting as a broker when needed. This will give you the best of both worlds while ensuring you are working with a specialist.
The number of points you should expect to pay will vary by loan program and lender. For very specialized loans such as owner builder construction loans, it is normal to pay up to three or even four points in total fees. This is a small price to pay for access to a program that will allow you to save tens of thousands of dollars while building the home of your dreams.
In addition to broker or lender fees, the closing costs will also include loan fees. These fees include items such as underwriting, document preparation, draw administration, loan processing and a variety of the other small fees. Most of these fees are fixed amounts, so the percentage will be higher for lower loan amounts.
The third category of owner builder closing costs is made up of things the lender or broker has no control over, thus the name "third party" fees. Third party fees are typically not affected by the type of loan you are doing. They are, however, influenced by the size of the loan. Third party fees consist of your closing agent's fees, title search and title insurance fees, recording fees to the state, county or locality and any state or local taxes. Most of these items are set by the state and local governments and are simply the price of buying or owning a home in that area.
All told, an owner builder can reasonably expect to pay approximately percent more for owner builder financing as compared to a construction loan with a general contractor. As a savvy shopper, it is up to you to do the math and decide if it's a good deal. For instance, imagine the extra fees will mean an extra $8,000 in costs for financing. You must ask yourself whether you are going to save more than $8,000 by cutting out the general contractor.
If the answer is yes, then you should proceed with the owner builder loan. If you aren't going to save that amount of money by being an owner builder, then you shouldn't be considering it anyway.
About the Author Chris Esposito's office provides owner builders with construction loans to allow them to manage the construction of their new homes without a GC. If interested, visit Owner Builder 101 at www.OwnerBuilder101.com.
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