Understanding the Difference Between a Simple Purchase Loan and an Owner Builder Construction Loan

If an owner builder understands the differences between his construction loan and other, simpler types of mortgage financing, then he will be much better prepared when starting his planning and financing. Owner builder construction loans are a more complicated process than a standard mortgage to purchase or refinance a home. Therefore, they will require a longer preparation and underwriting time.

If an owner builder does not account for some extra time required in his financing and planning stage, he runs the risk of falling behind schedule on the construction project or, worse, losing the land that he wants to build on. Therefore, understanding the reasons why an owner builder construction loan requires a longer timeline will save an owner builder from potential disaster.

The first, and main, reason that your owner builder loan will take longer than a simple purchase loan is that you, the owner builder, will need a longer time to prepare for it. Unlike standard mortgages, an owner builder construction loan will require you to choose your home plans and put together a detailed budget to build the house.

There is no way around it. You will need extra time to find the right home plans for your dream house. Depending on the source of the blueprints, an owner builder can take anywhere from a week to a couple of months to get the home plans finalized.

If you are purchasing plans from an online source, then you will have your blueprints within a week or two. However, if you decide to make modifications to the plans, it could take a month or more to get the revisions. Likewise, if an owner builder needs to get those online blueprints engineered to meet local building codes, then he needs to account for extra time to do this.

Whereas online blueprints can be a fast process, an owner builder who hires an architect to design his home from scratch may need a couple of months to get it right. The length of this process will depend largely on the amount of time that your architect requires for the design, as well as the number of revisions that you request as the future homeowner during the design process.

Now that you have your blueprints finalized, your job as the owner builder is to put together budget numbers to build your dream home. It's not a complicated process, but it does require time for you to get written price quotes from your local sub-contractors. The best way to do this is to provide a set of blueprints to the sub-contractor and wait for him to get back to you with a written estimate for his labor or materials.

The budgeting and bidding process can take an extra few weeks for an owner builder. But, if you don't take the time to do it right, you will be setting yourself up for failure during construction. That's why it's so important for an owner builder to understand the extra time required in his planning as compared to a simple purchase or refinance loan that doesn't have any blueprint or budgeting requirements.

In addition to a longer planning phase, an owner builder construction loan will also have a slightly longer underwriting timeline. The extra time requirement is due to the fact that owner builder loans basically require two underwriting approvals - one for the borrower's qualifications and one for the project itself.

In other words, even the most qualified owner builder client is not going to get through underwriting if he is building a home with a sub-par appraisal or budget. On the other hand, a very weak borrower will not get approved in underwriting just because he is building a home with a great budget and appraisal. Therefore, both sides of the underwriting approval process are equally important.

The extra time needed for owner builder planning and underwriting is not a big deal as long as you understand the reasoning behind it and plan accordingly. If an owner builder understands the timeline, he can plan for a successful project. But, an owner builder who thinks his construction loan is the same as a simple purchase or refinance mortgage is going to set himself up for failure right from the beginning.