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OWNER BUILDER CONSTRUCTION PROGRAM
What is an Owner Builder?
Over the last several years a trend has developed where families have opted to manage the construction of their new home themselves, becoming "owner-builders". The home owner replaces the general contractor as the project manager, organizing the sub-contractors and trades people who actually build the house. This trend is growing, it is estimated that last year more then 125,000 families built their own homes.
Why be an Owner Builder?
Initially most consider the owner builder option for financial reasons. Eliminating the general contractor’s fee can save 20% to 35% on the cost of building a new home. This can mean a savings of $50,000 to $85,000 dollars on an average $250,000 dollar home. This savings translates into equity, the difference between what the home is worth vs. what is owed on the mortgage. In most cases this equity replaces the down payment; and often eliminates the PMI (private mortgage insurance) requirement.
Another reason to be an owner builder is greater control and security of construction loan funds. The established general contractor model gives the builder full control over the disbursement of construction loan proceeds. More and more consumers are questioning the wisdom of this arrangement, opting instead to control the funding of the project themselves.
Self builders also have greater control over the quality of the materials and workmanship used to construct the home. Unlike a contractor, who's primary goal is profit, the home owner's goal is value. The owner is involved in one project not several, allowing them to dedicate the time required to focus on the details. It is not surprising then that Owner Builders have a greater success rate at completing these projects then licensed general contractors do.
In the end however most owner builders report that the real payoff is the satisfaction of mastering a challenging task while ensuring the financial security of their family.
Where to start?
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Owner-Builder Q & A:
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Q. What is a Construction-to-Permanent (CTP) Loan?
A. Often, getting approved for a construction loan can be tricky. In many cases, two loans are required--one for construction and one for permanent financing. Usually you will have to pay closing costs on both loans, not to mention the extra paperwork, time and hassle involved. We offer a single-close Construction-to-Permanent Loan that combines both construction and permanent financing into one loan.
1st USA Mortgage Corporation's Construction-to-Permanent Loan allows for a construction period of 6 to 12 months. Other options are also available. And when your project is complete, the loan simply converts to a permanent mortgage.
Q. Besides a CTP Loan, what other costs may be associated with the construction of my home?
A. In addition to the contract price, it is common for a construction lender to build a contingency reserve into the loan. This is a specified percentage or dollar amount usually required by the lender in case of unforeseen circumstances that could negatively impact the construction of your home. The amount required is usually based on a percentage of the contract price, on-site costs or loan amount.
Additional costs will vary, and may include construction loan closing costs and fees and special insurance requirements. But don't worry our Construction-to-Permanent Loan includes on-site costs, off-site costs, closing costs, interest reserve, contingency reserve and lot purchase or value.
Q. When will I have to make loan payments?
A. Our Construction-to-Permanent Loan program includes an interest reserve, which means that you will not have any payments out of pocket during the construction period. We will incorporate an interest reserve account within the loan amount. Depending on how quickly you use your construction funds, there may be sufficient funds within the construction loan to carry you through the entire construction period. As each construction project is unique, you will need to discuss your options with your Construction Specialist.
Q. Will the payments on my construction loan include principal and interest?
A. Not necessarily! You may have interest only payments until the house is completed. Generally speaking, this means that interest is charged only on the amount of funds used. Interest on our Construction-to-Permanent Loan is charged based on the funds used. Payments are interest only during the construction period, converting to principal and interest payments upon completion of the home.
Q. What will my construction lender need in order to review my loan request?
A. Remember, you're asking the lender to loan money on your dream. We will need to see that dream as clearly as you do. Therefore, in addition to standard credit documentation, we will want, at a minimum, copies of the following documents to start the process: Call me for a step by step process so that you can see how simple it is.
1. Final plans and specifications. These are needed in order to obtain an appraisal.
2. Purchase contract for the lot (or Settlement Statement if you've already purchased it)
3. Property profile (description of materials)
4. Line Item Cost Breakdown from the builder
5. Builder's construction contract
6. Copy of Builder's license
7. Builder's statement or application
Keep in mind that you need to obtain the necessary building permits for your community.
Q: What special insurance requirements will I need for my construction project?
A: During the construction of a home, the borrower has additional risk that he or she will not normally have on a home that is already built. There are four principal insurance requirements for this type of loan.
Course of Construction Insurance , also referred to as “Builder Risk Insurance”, is a property policy designed to provide coverage for the property while under construction. Once the improvements are completed and the permanent phase begins, the course of construction policy may be converted to a standard “all risk” homeowner’s policy.
Workers’ Compensation Policy or endorsement covers the contractor, sub contractors and others who will be working on the subject property.
Flood Insurance is required if any part of the property improvements lie in a Special Flood Hazard Area (SFHA) “A” or “V”. The determination that your home is in a SFHA may be made at the time of loan origination or at any time during the term of the loan. If required, flood insurance must be obtained before funding.
Liability Insurance provides protection from legal liabilities to third parties.
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