Financing the Owner Builder
Financing the Owner Builder
As a builder, you will most likely need to borrow money. However, most lenders tend to be very strict about financing a builder, while many do not lend to builders at all.
Many builders are wasting valuable time and money trying to figure out which lenders they should go to and who has the best rates available.
Since time is often crucial, it is important that the person you speak with knows what they are talking about. This can be difficult in an industry where everyone claims that “if we can not get you the money, nobody can.” Unfortunately, not all brokers were created the same!
How much can you borrow?
While lending criteria vary from lender to lender, you can usually borrow up to 80% of the LVR (loan to value ratio) on a builder’s loan.
Lenders typically use one of the following methods to determine the value of the project.
Lenders A) Hard costs
Lender B) Final value
Lender C) Hard Cost & Final Value – The lesser of the two.
Hard costs are defined as the actual cost of the land and the actual cost of building the house. The final value is the total value of the property after completion of the construction work. This will be determined by an evaluation report after completion
The customer “Jim Brown” buys land worth $ 250,000. The construction cost of his house is $ 500,000. Its total hard cost is $ 750,000.
Once Jim’s home is completed and rated, the valuation is $ 850,000.
If Jim Lender used A, he would be able to borrow 80% of his hard cost. His maximum loan would be $ 600,000 (80% of $ 750,000).
If Jim used Lender B, he would be able to lend 80% of the value of the property once it is completed. In this case, Jim’s maximum credit capacity would be $ 680,000, which equates to 80% of $ 850,000
If Jim Lender uses C, the lender will use a combination of these two factors, usually using the lesser of the two. In Jim’s case, this would lower his maximum borrowing to $ 600,000.
Lenders typically prepay payments in five to eight stages. Most lenders use five stages of progress. Stage payments are always retroactive and never before to be made.
The lender instructs an appraiser to go to the site and evaluate the work done. Some lenders pass these costs on to the borrower. However, most will cover these costs themselves. If the cost of the valuation is the cost of the borrower, the amount would normally be close to $ 250 to $ 300 per valuation.
While the amount that the bank advances at each level is determined by a score, the levels are normally split as follows:
As owner builder, you must provide a specific documentation. Usually these include:
A complete set of DA-approved plans
Full specification and timetable for completion
If applicable, construction certificate (CCC)
Every technical detail
Estimated breakdown of costs. (Your mortgage broker should be able to provide you with a template for this.)
Manufacturer warranty and liability of the owner
CV of any construction experience you might have
Depending on the LVR (Loan to Value Ratio), you may need to create a QA report. This would be done depending on the complexity of the project and value of the property at the expense of the borrower and in the vicinity of 500 to 2000 USD.
Owner Builder provides you with a wide range of loan packages, including Low Doc & No Doc Loans!
If possible, get mortgage advice before starting construction. The person you seek advice should have extensive experience with Owner Builder Finance as it is a specialist area.