Best Owner-Builder Construction Loans

Building your own home can be exciting. You’ll get to customize your design, pick your features and create your dream home. But if you’re like most owners planning to build, you’ll need help with financing. That’s where builder-owner construction loans come in. These specialized loans work like a mortgage but give you the needed cash to build your dream home. Read on to understand how these loans work, and find some of the best mortgage lenders for owner-builder construction loans.  

Quick Look: Best Owner-Builder Construction Loans

• Best for Low Credit Scores: Reliant Home Funding Inc.
• Best for Jumbo Construction Loans: U.S. Bank
• Best for All States: Cardinal Financial Corp.
• Best for Low Down Payment: Wells Fargo
• Best for VA Construction Loans: NBKC Bank

Best Owner-Builder Construction Loans

The best owner-build construction loans offer low-interest rates, competitive terms and excellent customer service to ensure you have the funding you need throughout construction. Read on to understand the offerings of each. 

1. Best for Low Credit Scores: Reliant Home Funding

Reliant Home Funding offers construction loans in 21 states and Washington, D.C. Its credit requirements are the lowest of any lender compared here, with a minimum credit score of just 500 for Federal Housing Administration (FHA) loans. Minimum down payment requirements vary. You can easily apply online to compare the best available rates.  

2. Best for Jumbo Construction Loans: U.S. Bank

If you’re ready to build your dream property and need an owner-builder construction loan of more than $726,000, U.S. Bank is a traditional bank that offers a variety of loan options, including lot loans. You can work with a lender at a branch location or online. If you’re an existing U.S. Bank customer, you could save up to $1,000 on closing costs. 

3. Best for All States: Cardinal Financial

Cardinal Financial offers loans nationwide and has the second-lowest minimum credit score on the list. While it offers fewer loan varieties, most borrowers can work with this owner-builder construction lender to secure a loan for their needs, whether it’s a loan for a low credit score or a jumbo loan. Cardinal Financial offers conventional, jumbo, FHA, Veterans Affairs (VA), U.S. Department of Agriculture (USDA), fixed-rate loans and refinancing.

4. Best for Low Down Payment: Wells Fargo

Wells Fargo brings a big bank name and strong reputation to its role as an owner-builder construction lender. Get flexible down payment options and various loans, including conventional, jumbo, FHA, VA, USDA, fixed-rate, adjustable-rate, construction and renovation loans, investment and refinancing options.

5. Best for VA Construction Loans: NBKC Bank

NBKC Bank offers competitive loan options in all 50 states, including construction and renovation loans. Minimum down payment requirements vary, while the minimum credit score for FHA, VA or conventional loans is 620, and a 680 minimum credit score is needed for jumbo loans. 

What Are Owner-Builder Construction Loans?

An owner-builder construction loan is a type of home construction loan specifically designed for permanent-build construction projects in which the borrower will be the homeowner. You may act as the general contractor on the construction project or hire a builder. The purpose of owner-builder construction loans is to support homebuyers planning to build a home rather than purchase an existing property. 

There are several key differences between these loans and a traditional mortgage. First, unlike a mortgage in which the lender pays out a lump sum, with an owner-builder construction loan, you’ll usually receive disbursements as certain construction phases are complete.  

Second, you’ll typically have a short timeline, usually a year, to complete the construction. During the construction phase, you’ll only pay interest on the loan. Once the loan converts to a mortgage, you’ll start repaying interest plus principal. 

How Do Owner-Builder Construction Loans Work?

Owner-builder construction loans are a type of construction loan. You will need to apply for an owner-builder mortgage with similar documentation to a traditional mortgage, including government ID, proof of income, savings and downpayment. Lenders will also look at total debt, debt-to-income ratio and credit score when assessing loan amount.

In addition, the lender will ask for detailed construction plans and cost projections. After you’re approved for a construction loan, you’ll receive an offer from the lender with terms including interest rate, repayment terms and disbursement schedule in relation to construction phases. 

While construction loans are typically only available for the construction phase, many will roll over into a traditional mortgage when the home is complete. 

How to Qualify for an Owner-Builder Construction Loan

Lenders’ typical criteria for approval include total debt, debt-to-income ratio, employment stability, total income, savings, down payment amount and construction plans with projected costs. 

Lenders have varying minimum credit score requirements. Some accept credit scores as low as 580 while many require a score of 680 or higher. Unless you’re applying for an FHA or VA construction loan, you’ll usually need to pay 20% or more as a down payment. Finally, your debt-to-income ratio shouldn’t exceed 45% to qualify for an owner-builder construction loan. 

How to Get an Owner-Builder Construction Loan 

If you’re ready to apply for an owner-builder construction loan, here are the steps you'll follow to secure the loan and start building.

1. Find a Reputable Lender

Start by researching lenders that specialize in owner-builder construction loans. You can do an online search to compare lenders and speak with your local bank or credit union. If you know others who have built homes locally, you can ask for recommendations for lenders, contractors and more. 

2. Gather Necessary Documents

Prepare and gather all the necessary documents such as government-issued ID, income proof, bank statements, tax returns and pay stubs. You’ll also want to have your credit history, construction plans, permits and any other documentation required by the lender ready. While most lenders require the same documentation, you can ask for a list ahead of time to ensure you come prepared. 

3. Create a Detailed Construction Plan

Develop a detailed construction plan that includes architectural drawings, blueprints, contractor estimates and a timeline for completing the project. For this, you’ll need an architect for the technical drawing and may require an engineer or other professional as part of your team. Usually, you’ll need to allow at least a couple of months for this process so you can plan and get started early on developing the plans. 

4. Apply for the Loan

Complete the loan application provided by the lender and submit all the required documents. Be prepared for additional requests for information during the loan approval process. You may be able to apply for the loan online or in person with the mortgage lender. Learn more on the steps for mortgage approval here.

5. Start Construction

Once the construction loan is approved, you can begin the construction process, following the plan that was previously approved by the lender. You can choose to work as the construction supervisor or hire a general contractor to supervise the building process and confirm with the lender as key stages are accomplished.

6. Be Prepared for Appraisal and Inspection

Lenders will likely require an appraisal and inspection of the construction site to assess the value and progress of the project. This is used to calculate the final property’s loan-to-value ratio necessary for loan approval. 

Advantages of Getting Owner-Builder Construction Loans

If you’re planning to build, there are major advantages to getting an owner-builder construction loan. Here’s why you may want to consider this type of loan. 

Cost Savings

Owner-builder construction loans allow you to save on labor and contractor fees by handling the construction yourself. You could also potentially qualify for lower long-term interest rates than a traditional mortgage. 

Flexibility in Design and Construction

As an owner-builder, you have the freedom to design and construct your project according to your specific preferences and needs. This is your chance to create personalizations and customizations to make your dream home 

Satisfaction and Pride

Taking on the role of an owner-builder can bring a sense of personal satisfaction and pride in completing a construction project. You get to be involved in every step of the construction process and have the joy of creating your own home from the ground up. 

Disadvantages of Getting Owner-Builder Construction Loans

Getting an owner-builder construction loan comes with disadvantages, from the time-consuming process and stress of building the home yourself to limited financing options. Here are the disadvantages you’ll want to carefully consider. 

Difficulty in Obtaining Financing 

Lenders may perceive owner-builders as higher-risk borrowers because of their lack of experience and professional oversight. While you can hire a general contractor, your financing options can still be limited compared to other mortgage options. 

Increased Liability and Risk

If anything goes wrong, you may be held liable for any accidents, injuries or construction defects. This can lead to potential legal and financial risks. You can get insurance to protect yourself in case of major accidents, but there are always additional expenses or construction delays that can add to the pressure of construction. 

Time-Consuming and Stressful 

You need to handle various aspects of the construction project, including planning, scheduling, managing subcontractors and coordinating inspections. Schedules often change in construction because of everything from the weather to material delays. The responsibility, time and management skills to build your own home make it something not all homeowners are prepared for. 

Get Owner-Builder Construction Loans with Benzinga’s Top Mortgage Brokers

Find some of the best owner-builder construction loans from Benzinga’s top mortgage brokers here. 

Building Your Dream Home

Securing an owner-builder construction loan can be the first step to creating your dream home. But it’s still a long road ahead. Prepare carefully by understanding the pros and cons of building your own home. Then, carefully compare lenders to find the best offers, terms and customer service. The lender will work as a partner throughout the construction process, so finding a lender you’re comfortable with is even more important for these loans.

Frequently Asked Questions