The construction of your dream home isn’t an easy or inexpensive task. Many land owners have to pay a substantial sum of money to get a general contractor to build their home for them. There is however an alternative that allows more control for an affordable cost. This is called an owner-builder construction mortgage and could or might not be the answer to building the home you’ve always wanted.
Who is an owner-builder?
An owner-builder is a property owner who is the general contractor for they build the house. The owner must manage a variety of tasks, which could be too challenging for someone with no experience dealing with large-scale projects. Most loan companies require some experience in construction or hiring of someone with the experience. If you are able to demonstrate the expertise needed, becoming an owner-builder is the most efficient, but more time-consuming method of managing the construction project.
What is an Owner-Builder’s Job?
There are many tasks that the owner-builder has to complete. In the simplest sense it is your responsibility of establishing an individual construction plan, hiring subcontractors and supervising every aspect of construction. On a more fundamental scale, there are many small tasks and considerations that include:
- The building permit must be obtained in all its entirety.
- The purchase of all the necessary materials
- Contractors must be scheduled to ensure that there are no delays
- Identifying possible conflicts of interest that could arise when two contractors work in the same place
- The disbursement of funds
Owner-builders do not oblige you to complete any of the building yourself, but you do can pick up a hammer and saving even more. Since you are the one responsible for the purchase of construction materials as well as the power to control the type and quality of the materials used.
What skills are required?
There are three essential skills that you need to master if want to become an owner-builder. First and foremost, you must have the ability to budget. Without a well-planned budget you won’t be able to afford the supplies and funds required for the task.
Another factor that should be considered when budgeting is the experience you have in the field of construction. Not only do you require this expertise when overseeing contractors and organizing construction, however a majority of lenders won’t approve the funds if you do not have the experience you gained from construction. Another option is to employ an on-site construction manager or a construction management company.
The most important skill is the ability to lead. You’ll be in charge of coordinating an entire workforce for complex projects. There may be a need to resolve any disputes in which two subcontractors try to collaborate within the same area. In other instances you may have to transfer information from one subcontractor to the next and take important decision on short notice if things go wrong.
Responsibilities Delegated
One of the main advantages of having an Owner-Builder Loan is that you are able to supervise the construction yourself. However, getting the loan typically requires a person with a certificate in construction to take part in the construction. However, there are two alternatives that are less expensive than hiring general contractors, each having their own advantages as well as drawbacks.
On-Site Project Managers
As an owner-builder you’re fulfilling the responsibility of the general contractor. Project managers on site take substantial part of the responsibility off your shoulders, as they manage your project in the course of the daytime. However, the downside is that manager fees can reduce the amount of capital you make.
Construction Management Companies
Employing a construction management company is the least expensive choice. However, these companies also do the most work. This is a great option if you intend to manage the project on your own but need the help of someone with a license in construction in order to get the loan.
Benefits of Owner-Builder-Loan Loans
There are many advantages of having an owner-builder’s loan that could help you get through the process both during and after construction. These are the most important reasons for applying for an loan of this kind:
Instant Equity
If you construct your own home, you will build instant equity. This allows you to refinance, get another mortgageor to sell the property once it’s completed. The equivalent amount of equity could be built up over a long period of time in normal circumstances, making the loan an investment that will yield fast yields.
Make money today and in the future
Owner-builder loans could save you up to 40 % of the construction cost depending on whether you build all the work yourself, employ assistance, or engage in project management. General contractors can cost as much at 20 percent to provide their service. So, the more you work with them your own work, the more money you’ll save.
The money can also be used to pay for an easier mortgage that has lower monthly payment. If you decide to put some of the money that you saved into your mortgage, you will be able to significantly reduce the amount interest you’ll be paying over the course of time.
Control Equals Satisfaction
As an owner-builder, you are in complete control of the building process, from the materials to coordination with builders. You can even choose to build the entire house your self, if you possess the skills. It means that everything is done according to your requirements, and you can feel the peace of knowing that you were a involved in every aspect of construction. This will make your dream home distinctive.
The disadvantages of loans for owner-builders
Like any other financial decision, owner-builder loan can have their pitfalls. In the majority of cases they can be a good choice. problems are worth the effort however they can be too challenging if you’re beginning from scratch.
It is difficult to obtain
With the current state of the economy and the current economic situation, these loans are becoming more difficult to obtain. These lenders consider them high-risk and typically require a certificate for construction prior to being able to look into the loan. This can be accomplished by hiring an experienced project manager or the construction management company, however this will cut into the budget of your project.
More Costs, Multiple Closings
Due to the danger of the construction loan, banks usually charge a higher rate for these loans. Owner-builder loans are not an exception, so make sure you are prepared for the costs. In many instances the lender will also safeguard their investment by demanding 2 closings: One prior you start construction and the second after the construction is completed. If you switch to an ordinary loan at time, you might need to cover additional closing fees.
How do you get An Owner-Builder Construction Loan
Construction loans for owner-builders are typically extremely difficult to get because of factors like the risk of the market and economics. These issues aren’t difficult to overcome, however they could require some looking around to find a trustworthy lender. Directories of construction lenders allow users to request quotes from several local lenders in one go. Talking to a professional builder and studying the procedure of building your own home are crucial steps to be completed prior to applying for an loan.
Making a Business Plan
The process of building a home is an extremely complex undertaking, and lenders want to know they know what they’re doing. It is essential to have a complete business plan that includes the projected time frame for construction process, and plans for delays that could occur. The entire cost should be covered, including:
- Building permits
- Material cost
- The cost of labor
Qualifying for the Loan
The lenders who provide owner-builder loans will scrutinize your financial situation thoroughly to ensure that they will be fully reimbursed. The information they review includes:
- Income
- Credit score
- Cash reserves
- Ratio of Debt to Income
Additionally, lenders will typically require a down payment of as high as 30 percent of the loan amount and they may also allow equity in land. The business plan you prepare is an additional evidence that you are fully aware of what you’re doing. Additionally, the lender could require that a person with an official certification for construction work be involved in the project prior to approval of the loan.
Steps to Post-Approval
After you’ve been approved, you’ll be required to form your team. Check that all subcontractors provide a guarantee and enjoy an excellent reputation. Verify the local building authority for complaints and request to view the previous work they have completed. More references or backgrounds that you can provide to a sub-contractor and the less chance that you’ll encounter problems with quality or efficiency.
If you don’t live on the site or involved in the construction aspect that is part of your project it is recommended that you be on site at minimum once a week to review progress and discuss the project with your subcontractors. The more involved you’re in the process, the less likely you’ll encounter delays. Because it is an investment, your involvement will not just reduce costs, but it will also aid in ensuring that the finished product is exactly what you want to achieve.
