Owner-Builder Loans Basics: What You Need to Know
As an owner builder trying to get a loan, there are many questions that you want answers. You may consult a financial advisor or a mortgage broker specializing in construction loans. And if you have started your research, you may have figured that getting an owner-builder loan can be a real challenge. However, to help you down the road to financing your owner builder project, we endeavored on answering those frequently asked questions related to acquiring an owner-builder loan.
Have you recently purchased a lot?
If you are still eyeing for affordable lots to build your dream home then the loan amount you are going to borrow will not only cover the house construction but also the lot purchase. It is always important to know what you can afford.
If you already have a lot to build your dream home, then you will only need to work on financing your home construction. The land should your ownership with documentation to prove it, share ownership, freehold interest or at least a period of not less than 3 years.
Why is it difficult to qualify for an owner-builder loan?
Loan companies view owner-builder loans as high risk considering that you (the owner builder) may have no enough experience in budgeting and managing long-term constructions projects. The likelihood of over budget and unfinished projects are some of the factors that loan companies are staying away from. Therefore, loan companies would like to see your skills and your ability to take on the management responsibilities of contracting your home project.
Where do I inquire about owner builder loans?
You can start your inquiry at your local bank or from owner builder lenders in your area. Start by stating your goal so that they can evaluate your financial position. If you have established rapport with your banker, there is a likelihood that they go the extra mile in providing you a feasible amount you can borrow against your financial position and present assets.
How much can I borrow?
Licensed builders are usually approved at 80% of the construction cost. For owner-builders (non-licensed), you can generally borrow from 50% to 70% of the construction cost. Therefore, it is important to note that when you consider an owner-builder project, you should have enough cash savings or perhaps another source of funding to complete the project.
How does the owner-builder loan work?
Approved owner builder loans are not disbursed in a lump sum. The funds are disbursed through what is called progressive payments. A valuer will run through your cost estimate and budget and will tell you to disburse initial funds for the first phase of construction (example – structuring). After the first phase of construction had been completed, the valuer again assesses the work done and after his approval, the second loan will be disbursed until the project is completed.
What documents are needed from me?
Banks and loan companies will require the following documents:
Owner-builder permit
Project plan
Construction cost estimate
Construction budget
Builder’s Insurance
What is an owner-builder permit?
An owner-builder permit is a requirement for those who want to build or manage their own residential project worth $10,000 and more. This includes projects assuming contracting roles such as construction, renovations, repairs, and other additional construction to an existing home. An owner-builder should apply for a permit at the state government authority in your area. The application can be done online or by booking a schedule to submit the application. Check the eligibility requirements to get an owner-builder permit.
Should I seek professional advice relating to the owner-builder loan?
Before you decide to submit an application for financing, it’s a wise decision to seek professional advice. Talk to a financial adviser and an accountant to assist with your cost management along with tradespeople and project managers. This move will help you see how much you can borrow and help you meet all requirements along the process.
