Using Owner Builder Construction Loans to Replace Contractor Fees

If you are considering building a new home, you may be considering an owner-builder construction loan.  The loan can save you money because it removes the contractor fees.  These loans have specific conditions you must adhere to in order to qualify.  The terms can be discouraging for many, but for a few people these construction loans can be practical and viable solutions.

How Do I Qualify For An Owner-Builder Construction Loan? 

A conventional construction loan assumes that you have hired a general contractor to oversee the construction process.  The contractor is hired to handle all paperwork and building permits, obtains materials and hires the necessary personnel required for the development.  The construction loan takes into consideration the contractor fees and either finances the entire amount, or a large portion to ensure timeliness of project and proper construction is used for the building.   

In contrast, with an owner-builder construction loan, you must be the general contractor.  This means that you are responsible for writing the construction budget, buying all materials, obtaining all necessary construction permits, hiring any subcontractors and day workers and overseeing the entire construction process. It's a big job.

Most lenders consider owner-builder construction loans to be very risky because inexperienced homeowners may underestimate the construction costs, face unexpected delays, or run into other problems which affect their ability to repay their loan.  To protect themselves, most lenders have very strict requirements.  In most cases, you will need to prove that you have had some previous experience with construction, and thus are able to oversee your own construction project properly.  You may also have to prove that you own the land free and clear, or you may have to make a large down payment.  Some lenders may even require documentation to prove that you have already sold and moved out of your current home.  

Most owner-builder construction loans also have very strict term limits.  Lenders offer six-month or twelve-month terms.  Additionally, the interest rates on these loans are  higher than conventional construction loans as well.

The Advantages

Many borrowers considering an owner-builder construction loan do not apply for these loan programs after reading the strict requirements.  However, if you are one of the few with the experience and expertise to get the job done, serving as your own contractor could save you a considerable amount of money in the long run.  A general contractor's fee falls somewhere around 20% of the total equity of the finished house, so the savings can be in the tens of thousands, depending on the vaue of your home.  Also, overseeing the construction yourself can give you more control on all construction expenses.  Everything can be negotiated, from the materials required for the home to the labor to build.  Economical decisions can keep the overall costs of the project low, which saves you money.