Frequently Asked Owner Builder Construction Loan Questions

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BUILDER REQUIRMENTS 

Q. May I act as my own General Contractor/Owner-Builder?

A. Yes and No. Some programs may allow you to act as an owner-builder if you are a full-time licensed general contractor. Others may allow you to manage, higher subcontractors and control how, when and to whom the funds are being made if you were to hire a project manager to supervise your project.

Q. Does the builder have to be approved by the lender. If so, what type of due diligence is done?

A. License status, business and personal credit check, status of commercial liability insurance, prior project, subcontractor and supplier reference verification.

Q. What documentation is required from the builder?

A1. Builder Application; this form ensures that the building professional is experienced, and current and past track record is in good standing.

A2. Description of Project Materials; this information describes the materials to be used in the construction of the home, for example, wood shingle roof or lightweight tile; redwood siding or cedar shingle.

A3. Cost Breakdown; This is generally prepared by both the builder and the borrower which includes the hard costs (lumber, bricks, mortar) as well as all the soft costs (permits fees, engineering fees, and the land loan balance.)

A4. Final Architectural Plans; These consist of a legible set of architectural drawings (building plans) prepared by an architect and approved through city and county planning. They typically include a floor plan showing all dimensions, outside elevations of the building, electrical and plumbing details, and HVAC.

A5. Contractor Agreement; a contract between the builder the borrower and basic lender previsions that describe scope of work, project timeline, project cost and contractor compensation.

A6. General liability Insurance; This insurance protects the General Contractor from lawsuits by sub-contractors due to injury. It also protects you by providing for damage coverage due to negligence. Because most projects include sub-contractors, ensuring that your General Contractor has sufficient liability insurance to shield you from possible claims from these independent contractors is important to protect your investment.

DRAW & PAYMENT PROCESS

Q. Will the payments go directly to the builder?

A. No. The funds go directly to the borrowers checking account which then you may pay the general contractor, subcontractors, and materials from that account directly./p>

Q. What is a Draw?

A. A draw is the method by which funds are taken from the construction budget to pay material suppliers and contractors. As you draw from your construction line-of-credit your loan increases by that amount. You begin making regular monthly payments) Principal, Interest and any required escrow) following the completion of your construction period and after final disbursement had been paid.

Q. How does the disbursement of the Draw work?

A. Unlike a line-of-credit you would first need to perform the work and then request a reimbursement of funds.
Step 1. Once a draw is requested, draw inspectors visit the worksite to evaluate current progress against what has been reported. They’re looking specifically to validate that all work items and materials included in a draw request are performed and issue a reimbursement in the form of a Draw directly to your checking account.
Step 2. The lender would then collect any lien waivers from General Contractor, Sub-Contractors and material suppliers paid to ensure that no liens have can be placed against the property at a later date.

Q. Can I get an advance draw on special item materials that require an upfront deposit?

A. Yes, with limitations. Items such as Cabinets, windows, modular and kit preorder items with property documentation such as an invoice for the deposit may be considered.

Q. What happens if your costs exceed your original budget?

 This is a common occurrence with construction projects. Something outside your control or an upgrade you make along the way can cause the overage. Either way, if there are not sufficient funds in the loan to pay for the overage, then you must pay for it with your own cash. Perhaps building a contingency fund into the loan amount is a better way to handle any overages. Ask your lender to explain their policy on the use of contingency dollars.

Q. Can I get an advance draw on special item materials that require an upfront deposit?

A. Yes, with limitations. Items such as Cabinets, windows, modular and kit preorder items with property documentation such as an invoice for the deposit may be considered.

Q. When do inspections occur?

A. Typically, inspections begin upon notification that the foundation is completed and continue throughout construction. With Built, inspections are automatically scheduled after a draw is requested. These inspections are made for the purpose of determining the percentage of completion of the property and that the home is being built in conformance with the plans and specifications submitted.

Q. How much time does it take to process a draw?

A. Each draw requested will be reviewed by the lender along with any required third-party inspections or Lien Releases and the funds will then be wired into your checking account within 2 business days thereafter.

PROGRAM TYPES

Q. What is a One-time Close or All-In-One Construction loan

Q. What is a 100% Construction Financing?

A 100% Construction Loan is attained by calculating what is the Loan-to-Future Value in comparison to a Loan-to-Cost calculation used by most lenders. A higher than average financing allows you to include all soft and hard costs into your loan, such as; mortgage payments, prepaids, closing-cost, contingencies, land loan, and other soft-cost items.

Q. What is a Physician Home Construction Loan?

The Physician Loan Program provides affordable construction loan services with 1-year tax returns, rate and closing costs discounts, including a higher than average loan-to-value ratio without the requirement for mortgage insurance.

Q. What is an AD&C financing?

Acquisition, Development and Construction (ADC) Loan is a loan package which finances acquisition, development and construction of real estate. ADC loans are usually taken by developers of large properties. ADC loans allows a developer to buy land, install infrastructure and build improvements. ADC loans are risky loans, as the value of the collateral depends on the development process adding significant value.

PROPERTY TYPES

Q. What is an Off-Grid Property?

Q. What is an ADU (Accessory Dwelling Unit)?

Q. What is a Prefab (Prefabricated) or Modular structure?

A Prefab & Modular homes are built in sections inside a facility and then moved to the home-site to be assembled.

TERMS

Mechanic's Liens

A mechanic’s lien is a lien that may be filed against the title to your property by any contractor, subcontractor, or material supplier who has not received full payment for the work or materials provided. If the Lender is made aware of the filing, they may choose not to further disburse on your loan until the lien is released.

Certificate of Occupancy

A document certifying a completed construction project’s compliance with all relevant codes and regulations, and proclaiming it suitable for occupancy.

Change Order

A document that defines any modifications to the original plans, stating the nature of the change, its cost, and any changes to the previous time frame, and serving as a supplement to the original contract

Draw

A single installment in the process of disbursement of construction loan funds

Interest Reserves

Interest Reserve is a dollar amount added to your loan to make your monthly interest payments during construction. During construction you actually make no monthly payments. At the end of construction, you owe more money because you have borrowed those monthly payments using the loan money. This feature is useful if you are selling your current home while living in your new home during construction.

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