The Nine Basic Steps of the Owner Builder Construction Loan

Owner builder construction gives you the chance to build your own home and earn a lot of instant sweat equity in the process. However, the loan process is more involved and time consuming than a simple purchase or refinance loan. If you are considering being an owner builder, understanding these nine basic steps will make the project financing and planning much smoother.

Step One: Owner Builder Pre-qualification

Before you invest too much time and money in planning your construction project, talk to an owner builder construction loan officer about qualifying for financing. Let's face it - almost none of us can build a house without borrowing money from the bank. So, take a few moments to speak with a lender who specializes in owner builder financing and learn the details about the program that you would qualify for.

Step Two: The Pre-approval

In the first step, you simply got pre-qualified, meaning nobody pulled your credit or examined any application documentation. At the pre-approval stage, you actually apply for the owner builder construction loan and give the lender the right to pull your credit report and review some income/ asset documentation, as well as review any extra details about the project you are considering building.

Step Three: Compiling and Submitting Your Documentation

The pre-approval mentioned in step two is going to be mainly based on the information that you fill out on the application. Now, you have to provide documentation to prove that you provided accurate information. No owner builder credit file can go through official underwriting until all of the paperwork and documentation has been submitted.

Here's a brief summary of the typical items required for an owner builder construction loan:

a) Income and asset documentation to prove you earn the income you claimed on the application and prove that you have enough money in the bank/ savings;

b) Blueprints and home plans will be required in order for the appraisal to be completed in step four listed below;

c) Owner builder budget will need to be accurately compiled so the lender knows how much money to lend to get the home constructed;

d) Subject lot purchase agreement (or settlement statement if you already bought it) and clean title insurance for the property to show that there are no hidden liens placed against the land.

Obviously, there are other items that will be needed, but these four items above are the stalwarts of an owner builder credit file. Once these items have been successfully completed, you are almost ready to go to the underwriting phase - as soon as the appraisal is done.

Step Four: The Construction Loan Appraisal

For owner builder construction loans, you will need an appraisal completed based on the land that you want to build on and the home plans that you want to build. The appraiser will examine your future home's plans and specifications and determine an estimated value based on the recent sale of very similar homes in the immediate area. If you are an owner builder who is attempting to build a home that is out of the ordinary for your local area, you will most surely have problems getting an adequate appraisal completed.

Step Five: Owner Builder Underwriting

Just like any other mortgage, your file will have to go through underwriting. However, unlike simpler loans, an owner builder construction loan will require underwriting in two basic stages - underwriting your credit worthiness as a borrower and underwriting the project's worthiness based on the appraisal and budget. Definitely expect the underwriting phase to last longer for an owner builder construction loan than would be required for a simpler purchase or refinance loan.

Step Six: Clearing Conditions

Once the owner builder loan is officially approved in underwriting, there will almost surely be several minor conditions or issues that need to be cleared up before you can close on the loan. Typically, these are minor issues, such as updating a pay stub from work or providing the latest bank statement. However, sometimes there will be questions and concerns about the appraisal that will need to be addressed. Often, the appraiser will have to make revisions or updates to the appraisal to satisfy any questions that the underwriter has.

Step Seven: Owner Builder Loan Closing

Once your file has cleared all conditions, your closing can be scheduled. You will go sit down with your closing agent or attorney and sign all of the final paperwork. If your owner builder construction loan is good, this will be your only closing required. You will not have to go through another closing once your home is completed and converts to the permanent mortgage. This closing is also the time that the construction loan will fund the money to pay off the land.

Step Eight: Taking Construction Loan Draws to Build Your Own Home

As an owner builder, you will take draws from the lender as you build your home. Hopefully, you will have chosen an owner builder construction loan that allows you to take draws based on individual construction items so you don't have to finance large chunks of construction at a time. During the construction phase, the lender will also continue to update the title insurance to ensure that nobody has placed any liens on the property while you build your own house. These title work updates are often called endorsements or date downs.

Step Nine: Convert to Your Permanent Mortgage and Move Into Your New Home

Once owner builder construction is complete, you can move into your new home and convert to your permanent mortgage. This should not require a second closing. If you took the time to put together an accurate budget and hire quality sub-contractors, then your owner builder project should end successfully. You should move into your new home with a lot of instant sweat equity that you earned by cutting out the costs of a general contractor and managing the construction process yourself, as the owner builder.