Owner Builder Loans
A vital part of the BGCH system is having excellent financing available to clients who want to build their own home in Texas. Our system works; thus, banks look to BGCH to assure the client’s success.
The financing for owner builder new home construction generally consists of 2 parts:
- The short-term construction loan from a bank, usually 12 month but longer terms are available. Obtaining the construction loan can be difficult, even for qualified applicants.
- The permanent mortgage loan from a mortgage company; acquiring a mortgage commitment, known as a takeout letter, is normally not as difficult.
THE CHALLENGE: Getting the Best Deal in a Specialized Niche
Financing the new home is the first place most clients think of shopping around to attempt to get the best deal. Owner Builder construction financing, however, is a very specialized niche. Often loan/mortgage officers (salesmen) will promise that they can finance owner builder construction. They are thinking of a regular builder loan, having never done an owner builder construction loan. When push comes to shove, the attorney for the bank generally will not approve the owner builder construction loan. This news comes at or near the closing for the construction loan, and results in wasted time, money and frustration for all involved. This rejection is caused by two reasons:
- Typically, the bank will not let you, the owner, handle the money; 99% of banks insist that a builder write all checks, pay all bills and collect line waivers. The reason for the goes back to the Texas Homestead Act. Most attorneys feel that the bank is on shaky grounds if you were to default on the construction loan.
- The typical Texas mechanics lien, to be signed by the builder, specifies that the builder pays the bills and obtains all lien waivers. As an owner builder however, you will pay all bills and obtain all waivers. BGCH gives you control of the money throughout the process, instead of the typical builder controlling all your building funds. This gives you great protection against a builder going bankrupt during the construction of your new home.
The bottom line is that most banks in Texas will not make an owner builder loan.
Large banks such as Chase or Wells Fargo are the least likely to make these loans; a very few small banks are willing to think outside the box to make owner builder construction loans. BGCH has done the shopping to find the banks willing to make these loans for you, to save you time and hassle.
RISK: Why are banks so strict?
Historically, some owner builders have failed during construction and left the bank with a partially finished home. Thus, bankers view building your own home as a high-risk procedure; they prefer a builder with a proven track record. After all, why should they loan hundreds of thousands of dollars to someone who has never before succeeded at home construction? Bankers are not in the real estate business and do not want to take back your house under any circumstance. They are interested in the return of their money, as well as the return on their money.
BGCH Takes the Risk
Part of the fee you pay BGCH is to take on the risk and back you up at the bank for the construction loan. BGCH mitigates the risk by:
- Careful planning and budgeting, including obtaining bids from quality contractors for the majority of building phases:
All construction must be fully budgeted and assumes that you are having all of the work done by qualified contractors. The budget must provide funds to complete the construction, no matter what. If you do some of the work yourself, you simply do not spend and do not draw the amount allocated in the budget for that phase. This means that the budget will often be higher than your final cost. Any unused portion of the construction loan is not drawn from the bank, and thus the mortgage is generally less than the construction loan.
- An emergency fund, or contingency, to protect against unexpected higher costs:
The rainy day fund is usually at least 5% added to your budget, making your construction loan higher than the budget. The idea is not to spend this contingency. It is simply an emergency fund, a safety net to ensure your successful completion. Any unused contingency is never drawn from the bank; thus; the final mortgage is generally less than the construction loan. This overage is available, however, for upgrades, such as a pool, at the end of construction.
- Recommending a cash reserve of 7-10% of the construction budget:
Your construction loan combined with your personal funds must cover construction costs, contingency, land payoff and closing costs. In construction, cash is king. BGCH recommends that you retain some liquid assets for cash flow purposes during construction. The bank will fund the construction by stages after the work in each phase is completed. With very few exceptions, the bank does not advance loan funds before the subcontractor finishes each stage. For example, the day the slab is poured, you complete the paperwork for the slab draw. After the bank draw inspector visits the site, and turns in his draw inspection report, the bank will fund the allocated slab draw to your account. This generally takes 2-3 days. You then pay the contractor for the slab. With the exception of a possible initial “soft draw,” you are able to borrow money from the bank only after completed work, not just any time you might need or want it. Any operating monies needed in the interim must come from the soft draw or your personal funds/credit lines.
- Obtaining key suppliers who offer credit terms, upon qualification, to BGCH clients:
This gives you the owner builder typically up to 30 days to pay for materials, depending on the date of purchase. One supplier offers 12 month no interest, no payment credit terms. This helps with cash flow needs once you get to the framing stage.
Our system of detailed planning and budgeting has led to success for our clients.
Decreasing Risk: What you can do –
There are 6 things necessary to qualify for a construction loan to build your own home in Texas.
- Good credit
- Debt-to-Income Ratio
- Proven regular income
- Good appraisal
- Cost well below appraised value
- Cash Available
Because the construction loan is viewed as being risky, a higher credit threshold is required to make and keep the loan process easier for you to qualify. The higher your credit score, the more favorable the terms you will receive on your loan.
Keep your debt low. Do yourself a favor; don’t buy a new car, boat or RV or make any other major financial commitments that will show up on your credit record until you have closed on your construction loan (one time close) or when your permanent mortgage is closed (two closings). You can absolutely nullify your ability to qualify for a construction loan by buying a large item on credit before closing on your home loan.
Having proven income is critical to qualifying for an owner builder loan. Stated income loans are a thing of the past. You will have to demonstrate current income from a job, pension, Social Security, regular withdrawals from a 401k, or other proof of income.
Banks are highly regulated. Regulations require that the bank have an appraisal from a licensed real estate appraiser. The new home to be built must appraise at an amount to more than cover the land payoff and the cost of new construction. Each bank has its own underwriting standards.
The last category of must haves in regards to owner builder financing in Texas is cash on hand. The bank is looking for borrowers who have financial resources to make the interim interest payments during construction. Remember, cash is king. The bank is looking at you as the builder, and builders need cash. The more cash you have, the easier it will be to qualify for a construction loan. If cash is tight, our lenders have ways of assisting you. Home equity loans, Home equity line-of-credit loans, 401k withdrawals, and family gifts can all be used to raise necessary cash.
Each bank has its own draw schedule. Remember, the bank funds the construction phase only after it is complete. You cannot get the draw before the work is done. An excellent example is appliances; the bank will only pay for appliances once the appliances are installed, not at purchase time or just after you purchase them. Banks do not front money for work to be done, even if you signed a contract with the subcontractor.
The good news is that BGCH is qualified as a builder with more than a dozen lending institutions who offer owner builder construction loans. Contact us today for a referral to experienced lenders who can assist you with the funds for your new dream home.