When you make the decision to become an owner builder, one of the first questions you need to ask yourself is how much will it cost? Pretty quickly after then, unless you are lucky enough to have a significant amount of cash, you’ll be thinking about how to go about getting an owner builder construction loan.
The secret to making an owner builder project successful is to plan each and every step. One of the best ways to commit to a plan is to write it down and stick with it. Once you have decided you want to go down the owner builder path, you will need to get a handle on how you are going to finance it. At this point, most people start to research owner builder construction loans.
Owner builder construction loans are, as the name suggests, loans that are designed specifically with the needs of owner builders in mind. One of the key features that sets them apart from standard home loans is that they usually offer the ability to have funds drawn down periodically. This means that you only use the funds you require as you require them.
Staged payments are the way owner builder construction loans are typically managed. This means that, while the total loan amount is agreed to at the start of the project, the money only becomes available as each stage is completed. This has two advantages. One is that the person or people who are borrowing the money only start to pay interest on it as it becomes available. The other is that it gives the bank or other financial institution that is lending the money the ability to check that the project is proceeding on track and on budget.
Many people who decide to get an owner builder construction loan hit their first difficulty when they apply for it with a regular bank that isn’t interested in owner builder loans. For many banks who primarily focus on standard home loans, owner builder construction loans seem like a higher level of risk. It is very common for people even with an extremely good credit rating and a history of successfully completed projects to have their owner builder construction loan knocked back by a bank for this reason.
For many people who are in the process of applying for an owner builder construction loan, it is useful to take some time to understand why many banks and financial institutions are reluctant to lend money in this way. Simply speaking, banks and financial institutions lend money for an owner builder construction loan based on the final value of the completed property. Although not always the case, owner builder construction projects are statistically more likely to run over budget and in some cases not get finished at all. If this happens, the bank will find it very difficult to get their money back by reselling the house as it is difficult to sell an unfinished house and it is very unlikely they would get anything like the money they would get for a completed house.
Owner builder construction loans can certainly be difficult to obtain and it is one of the main reason people often turn to brokers who specialise in this kind of loans. Brokers who are preparing documents for banks all day every day understand the methodology that banks use to assess a loan and they are often able to present information in a way that makes the banks understand the true value of the project.
One of the keys to getting an owner building construction loan approved is in showing to the financial institution that there will be a high level of value in the project and therefore a high level of security over their investment. There are many types of information you can present to make this a more attractive proposition for banks. For example, you could include values of similar houses in the area as well as your history of successfully completing similar projects.