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| | Owner Builder loans are, perhaps, the best way to finance new home construction. An owner builder loan is, in the lending trade, most often referred to as a "construction to permanent loan" - meaning that it takes you from a construction or building loan through the building process to then "convert" or "modify" to a typical, permanent mortgage. We, at JumpStart, do not make the loans and we derive zero financial benefit from them. We are not mortgage brokers and we are in no way affiliated with any of the companies that we recommend. We simply offer direction on the owner builder loan product as an overall service of our building program.
In an owner builder loan, the lender most often finances both your purchase of the building lot and the construction of your home according to the contract price you establish with the home builder. When your home construction is complete, evidenced by a Certificate of Occupancy from the local building authorities, the lender automatically converts your construction loan and all funds that you previously borrowed to a permanent mortgage. Some lenders give you choices for the type of permanent mortgage you want including fixed, adjustable rate, interest only, etc. | |
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| | Owner builder loans are the only financing vehicle that JumpStart Developments utilizes, mainly because this loan type has several advantages:- With an owner builder loan, as long as we identify the building lot first and close on your lot as part of the loan, there are no long term carrying costs for us as builder or you as buyer.
- In most cases, owner builder loans, unlike a construction loan followed by a permanent mortgage, do not require that you go through two real estate closings. First, to purchase the lot and do the Construction Loan portion. And then, a second time once the home completes to close with your permanent financing in place. This saves money in closing costs, lender fees, legal fees and recording costs.
- And, owner builder loans reduce the home builder's expenses by eliminating the need, on the part of the builder, to finance labor, materials and land in the construction process. When you save the builder money, you should be saving yourself money on the price of your home.
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| | JumpStart works with multiple lenders for owner builder loans in an effort to maintain the best possible loan terms for our buyers. Lending guidelines can and do change overnight and what was a good deal last week from Lender A, is now not nearly so good or available as what we find is available from Lender B. We try to direct you to the best lending source "du jour" - not always an easy task. | |
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| | The terms that we get for owner builder loans are among the best in the industry mainly because the lenders recognize and give credit for the equity that we are giving you in the home. Our standard terms based on the current lending environment require only a 5%-10% down payment against your purchase price. The balance, including closing costs and interest during the construction period, can be borrowed.
EXAMPLE: You purchase your combined home and lot from JumpStart for $340,000. As part of making the owner builder loan, the lender's appraiser estimates the value of your home as a finished product and gives it a present value estimate of $425,000. As part of the transaction, you have agreed to make a down payment equal to 5% of the overall purchase price (.05 X $340,000 = $17,000). So, you are then asking the lender to finance $340,000 less $17,000 down payment or a total of $323,000.
Most lenders limit the amount they will loan on a property based on a loan to value calculation - referred to in the business as LTV for short. In the typical home purchase mortgage, lenders have traditionally gone with an 80% LTV, meaning that they will loan up to 80% of the home's value and want the buyer to make a 20% down payment. In our example, the lender pegged our home's value at $425,000. Therefore, on a common 80% LTV, the lender would be willing to loan 80% of $425,000 or $340,000. Hey, wait a minute; this was the entire purchase price, wasn't it? That would be correct and, until recently, many lenders were willing to loan this full amount.
Today, the guidelines that most lenders employ will require a 5% to 10% down payment, if for no other reason than they want you, as the buyer, to have some cash investment or personal stake in your home. | |
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| | If you do not already realize this fact, your personal credit score or Beacon Score is probably the most determining factor in the loan process. Without a solid credit score, you often will not qualify for some loans at all, it will cost you a higher interest rate on loans you do get and, in the best case, you will be forced to make a higher down payment on properties than would another borrower - in other words, the lender will not give you the benefit of a higher LTV for your loan. Whether it is right or wrong, lenders rely on credit scores to assign risk. The lower your credit score, the higher risk you are perceived to be as a borrower. In reaction to this higher risk factor, lenders will often charge you a higher interest rate and/or require you to put more money down in order to lower the LTV ratio on your loan.
Most of the lenders we have worked with will require a minimum 680 credit score in order for you to qualify for one of our owner builder loan types. Individuals with lower scores may still obtain the owner builder loan, but they will generally be required to make a greater down payment. Husbands and wives please note that only one of you needs to meet this standard, not necessarily both. There are other considerations, as well, such as liquid assets you can show, and income, but if we were to put the deciding factors for your loan in order of importance they would be credit score first, then assets, and last of all, income. | |
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| | In our owner builder loan programs, lenders also assess risk one other important way. They know that you will be the owner of the home, but they want to know what type of owner you are. This consideration has to do with your use and intent with respect to the home you are building. In general, lenders create 3 categories for this purpose:- Primary residence - it will be your primary place of residence
- Second Home - not your primary residence and located at least 70 miles from your primary residence. (lenders are split over the question of whether you can own more than one second home/vacation home, so how this is viewed will somewhat depend on the lender.)
- Investment Property - if it is not your primary residence and it is not purchased for your use as a second home, it must come down to investment.
Lenders view a home purchased as a primary residence to be the least risky of the 3 categories and investment property to be the most risky category. The rationale is that the last place you would walk away from in a period of tough financial choices would be your primary residence and the first thing you'd be willing to abandon would be an investment property. That may or may not be true depending upon the relative equity in the properties, but it is how the lending guidelines work. Most of the loans that our buyers obtain are for second home or primary residence. Owner builder loans are possible to get for the investor category, but again, the terms will be less attractive in terms of LTV ratio and perhaps interest rate as well. | |
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