Obtaining an Owner Builder Loan
Hello, and welcome back to our blog! Here at Owner Builder Loans, LLC, we understand the appeal surrounding building a home from the ground up. When a person chooses to build their own house, they get to call all of the shots, design the house as exactly as they want, and, most importantly, can truly say that the house is theirs. While having this level of control over the construction, layout, and final design of a house may sound exciting to the average person, it should be noted that building a home is not always the easiest process. Almost overwhelmingly, people do not have the hundred of thousands of dollars that it takes to build the average home. This means that they will need to procure a loan to build their home, a feat that is easier said than done. In today’s post, we are going to go over a few things that people need to keep in mind when wanting to construct their own home. Continue reading below to learn more.
Standard Mortgage Loans May Not Be Possible
For the most part, it is relatively easy for people to get approved for a conventional mortgage when trying to purchase a home that already exists. As long as a person has good credit, has enough money to make a down payment on the home, and has a source of income that can cover mortgage payments, most banks have no problem issuing a loan so that they can purchase a house. Conversely, it’s almost impossible for people to secure traditional mortgage financing when trying to build their own home. This begs the question of why it is so difficult to secure a bank loan for a home construction project. However, when you think about it, it makes a lot of sense that banks would be wary to provide such loans. To understand why it is so difficult to secure a mortgage loan for an unbuilt home, simply look at the situation from the perspective of the bank. With traditional mortgages, the banks have the home to use as collateral in the event that the homeowners are unable to make their mortgage payments. With a home that hasn’t been built yet, no such assurance exists. Basically, home builders are asking a bank to provide a loan for a home that does not yet exist and, in some cases, will never exist. Luckily, owner builder loans have filled this financial void.
Construction Loans Provide Initial Capital
If a person plans to build their own home, they will need to pursue more specialized forms of financing. This is where owner builder loans come into play. These loans are typically a short-term financial option that can be used by a person to cover the costs of building a home. Because of the inherent risks associated with these loans, interests rates are typically higher than traditional loan rates, but once the construction of the house is completed, a person may either refinance the construction loan into a permanent mortgage or procure a new loan to pay off the construction loan that has a lower interest rate than the owner builder loan.
As we mentioned, owner builder loans are inherently more risky because of the fact that there is no real capital to hold the loan against. Because of this, most owner builder loan companies, including us here at Owner Builder Loans, LLC, require certain circumstances to be met before we provide any person with a loan. This helps to protect our investors and, in our opinion, is why we feel that our loans are a great investment opportunity for those looking to profit from short term investments. Below, we have listed a few of the typical requirements that construction loan providers require from those individuals looking to procure a loan to build a home.
- A Solid Plan: All providers of construction loans require a detailed plan from the owner builder. This means that a person must supply a comprehensive list of construction details that includes everything from the floor plan, type of building materials used, house dimensions, land costs, and anything else that is financially related to the home construction process. Additionally, loan providers require that home builders provide a project timetable. Because construction loans are provided with the condition that they be paid back relatively quickly, lenders like to have an idea of when a person is going to be done with their project.
- Down Payment: Because of the risk involved with owner builder loans, most providers require at least a 20 percent down payment, with some providers requiring as much as 25 percent. If this capital cannot be procured by the person seeking the loan, it is very unlikely that the lender will provide them with a loan.
- Qualified Builder: Across the board, lenders will require that a person who wants to build their own home have a qualified builder involved in the project. This means that the person must have a license defining them as a general contractor with a previously established home-building reputation. This provides the lender with the reassurance that someone involved with the project has experience actually handling a construction project, greatly increasing the chances that the project will be completed on time and within budget.
What Does All of This Mean to Investors?
While we here at Owner Builder Loans, LLC are in the business of providing people with owner builder loans, the purpose of this page is to explain to you, the investor, why an owner builder loan is even worthy of your consideration as an investment opportunity. Below, we have listed a few points that we feel make a great case as to why you should choose our loans as an investment opportunity.
- Protection: Unlike many investment opportunities, our loans offer protection for investors because any losses are first absorbed by our company’s own equity. To further ensure that our investors are protected from the uncertainties of the market, we have adopted a conservative Company Equity Policy that mandates that the total of all investments plus any lines of credit issued to our company cannot exceed one times Owner Builder Loans, LLC’s equity. What this means is that the company could, in theory, sustain a loss of 50 percent and still fully satisfy investors. Part of what makes this possible is that investor dollars are not used to fund individual projects, but rather to fund a pool of construction mortgages. While these policies don’t completely eliminate risk, they go a long way in making sure that our investors are as protected as possible.
- Hands Free Investment: Because we utilize investors money to fund a pool of owner builder loans, investors are never tied to a specific loan. Investors do not have to underwrite any of the borrowers, do not have to manage any of the loans, and do not have to inspect any of the projects that are being completed. Our loans offer a hands-free investment with no transaction fees, maintenance fees, or commissions. We handle all of the work while you simply earn a great fixed rate on your investment.
If you are interested in learning more about the investment opportunity that our loans offer, please get in touch with us today through our website or contact us by phone.