Five Creative Ways to Secure an Owner Builder Loan Without a Down Payment at Closing

Owner builder construction loans, like the rest of the mortgage industry, have had to tighten their belts to survive in today's lending climate. For borrowers who wish to build their own homes, this translates into tougher guidelines to secure financing. However, there are still four creative ways that an owner builder has available to close on a construction loan without a down payment.

If you want to be an owner builder, then that means that you want to cut out the costs of a general contractor and build a home that is valued well beyond the total cost of construction. Therefore, you may think that this sweat equity that you are going to build into your home should cover any requirement for a down payment.

Not too long ago, you would have been right. Owner builder construction loans were being closed everyday with borrowers putting no money into the deal. Looking back, it seems almost insane for a lender to provide financing with no cash requirements for people who want to build a home without a general contractor. Heck, even loans that do require licensed, approved builders nowadays require some cash from the borrower.

So, if you want to be an owner builder today, you should expect to have a down payment of at least 5%. When you consider the level of risk that a construction loan represents to a lender, this is still a phenomenal deal. But, if you are an owner builder who has no real savings available for financing, you may be able to secure a loan with no down payment out of your pocket by using one of these five methods.

The first way to close an owner builder construction loan without bringing a down payment to closing is to get an exception to waive the Interest Reserve feature of the loan. The Interest Reserve is a pot of money wrapped into your loan to allow you to go through construction without paying the mortgage payments out of your pocket. It's there to protect you, the owner builder, from having to make multiple house payments during the construction phase. But, if you are a well-qualified borrower, you can request an exception to waive this pot of money and make payments as you build.

If you are granted this exception, your interest payments that you make as you build will take the place of the down payment on your owner builder loan. However, this exception is getting tougher and tougher to get as the mortgage industry continues to tighten guidelines. You may be able to waive only a portion of the Interest Reserve and have to bring a portion of the typical down payment. That's not bad, but let's look at some other options available to you.

The second method is probably the most common way that an owner builder can avoid bringing a down payment to closing on the construction loan. If you own your house, you can cross-collateralize the equity from your current home to waive any down payment requirement. At some point while you build your new home, you will sell your current home prior to moving into the new house. An owner builder can use a portion of the profits from the sale of the old home to put into the new loan and move into the newly built house.

But, if you don't own your home, then you may still be able to get an owner builder construction loan without a down payment by owning the land that you want to build on. If you have owned the land for less than a year, then you will get credit for the cash that you already put into it. Or, if you owned the land for over a year, then you get full credit for the actual value of the land. Imagine you bought the land for $30,000 a year ago. Today it might be worth $40,000. Even if you still owe $30,000 to pay it off, you will get credit for a $10,000 down payment as an owner builder!

If none of these three methods will work for you, then you might be able to secure financing using this fourth way: counting any of your pre-paid costs toward your down payment. For example, if you are an owner builder who has been planning your project for a while, then you may have already purchased blueprints and plan engineering. Or, you may have already installed a septic system on your land. Or, you may have made a deposit to a material package provider. Whatever the expense, if you can document it, then you can apply it toward your owner builder construction loan and avoid a down payment at closing.

And, finally, here's the fifth, and maybe most creative, method. If you want to be an owner builder, you may be able to work out a deal with the seller of the land. If the seller will agree to hold back a portion of the purchase price, then you can close on the loan without a down payment. The seller will have to wait until you finish building your home until he gets paid that amount that he agreed to hold back.

Why would a seller do this? It's simple, really. It's a buyer's market right now, and sellers are often desperate to sell their property. It may be a great deal for them to get the bulk of the sales price at closing, then get the remainder once the home is built. And, you can proceed with your owner builder construction loan without bringing any cash for a down payment to closing.

The mortgage industry has had to dramatically alter the lenient guidelines of yesteryear. However, if you want to be an owner builder, there are still some great ways to limit or eliminate potential down payment requirements.