Congratulations on your wise decision to build and/or contract the construction of your Dream Home! Provided you follow sound construction wisdom and building practices you will find this decision to be one of the most profitable and enjoyable experiences of your life!
One of the most vital aspects of the home construction process is the construction loan and it’s structure! Over the last 3-5 years Owner Builder Construction Loans have come a long way and despite the sub-prime mortgage woes and credit crunch there is still plenty of money to be lent to owner builders! From a lenders vantage point, construction loans have proven to be some of the lowest risks, best performing loans for lenders because people who build a home generally LOVE those homes and are more likely to live in the home longer than non-Owner built homeowners! So the first thing you want to understand is that the banks really DO WANT YOUR BUSINESS! (Provided you have good credit and assets!)
Qualifying for a Construction Loan is really not much different than qualifying for a standard real estate loan but there are some additional considerations that you need to think about. Things like the total cost, the type home of you will build and whether you will have Builder oversight or not. I strongly suggest that at a minimum you pay to have a builder of record who assists and/or manages the construction site, trades and project for you. You also want to identify and gather all of your income, checking and other financial data so that you are well prepared for the application process.
There are (2) primary types construction loans:
#1 – Interim Construction Loan – this is a short term loan, that must be refinanced or paid off entirely at the completion of construction. The downside to this particular loan is that your closing costs are higher due because you have two separate closings and they are higher risk because you can’t lock the interest rate of your end loan. The primary benefit to an interim construction loan lies in that it allows you to pull out (or access the equity and get cash) of the home upon completion. In most states this is accomplished via a home equity line of credit. I personally only advise accessing this equity when you have had substantial appreciation since the beginning of construction and/or you plan on investing the proceeds into good low-risk cashflow producing real estate!
#2 – One-time Close Construction Loan – this loan is quickly becoming the industry standard because of the numerous advantages built into the loan. For starters, this loan has no interest rate risk because you can lock the interest rate the day you are approved and that interest rate can be reserved as far as 1 year in advance! (HUGE BENEFIT!) Another major benefit over the Interim Construction Loan is that the One-time Close Loan only has 1 closing so you only have to pay closing costs once! When structured properly you can also roll all of your soft costs (soil tests, surveys, engineering & plans) into the loan as opposed to paying them in advance out of pocket!
Now that we know what the (2) primary options are for financing our Custom Dream Home, let’s look at some tips and strategies to be mindful of as you go about planning your project. Now there are several Owner Builder Construction Loan programs that will literally lend you the money and let YOU manage/build your own Custom Dream Home without any other builder oversight! (certain states have Builder requirements) Personally I recommend against building without any builder oversight unless you are a builder yourself because the loans that allow this tend to be very expensive and most don’t offer the One Time Close option so you end up spending several thousand dollars in additional interest and lender costs that could have been saved! I also recommend against this because it is an extreme amount of financial risk and liability to build a home if you have never built a home before!
Here are a few other money saving considerations to be mindful of regarding Construction Loans:
Structure your loan so that you don’t have ANY payments during the construction period!
Add the “Float-down” option when locking the interest rate so that if rates drop during construction you can get the new lower rate!
Confirm your building schedule with your builder to ensure that you have enough draws. (draws = check disbursements)
Be sure that you have a survey completed once the home construction has been completed. (the mortgage company will need it!)
Always add additional time to the interest rate lock period as construction always takes longer than planned!
Any one of the (5) tips above could save you thousands and thousands of dollars and a gang of headaches! I have seen people lose plenty of money and time because no one shared these essential Owner Builder Construction Loan tips! But you on the other hand are well-equipped with this information but this still only scratches the surface of the full scope of building your Custom Dream Home! In my practice I see people who take the time and invest in their education and I also see those who throw caution to the wind and ignorantly jump in head-first with no guidance! Months later, the results always seem to show that the cream rises to the top and those who have not thoroughly equipped themselves, hired a professional team of experts and followed their advise seem to have lackluster results at best and a huge financial catastrophe at worst!