It’s a common occurrence for us these days – each weekend Megan and I find ourselves out in the yard, doing much of what could be done by a professional landscaper. But we’re out to save money, and why wouldn’t we? We’re young, fit (somewhat), and after countless hours of research, figure we can do the job ourselves. The attitude we have towards our landscaping should (and likely will) translate across to many home improvement projects in the future. In many of these cases, it will likely be a waste to hire a contractor for simple home improvements that we will be able to do ourself. It’s this area of DIY of home improvement that gets confused with full scale owner builder construction and, sometimes, these projects tend to blow out – requiring a lot of money, which has either been put away for a rainy day, or forces you to borrow to finish the job. Really, the difference between a home improvement project and a full owner builder construction or rehab project is simply a matter of scale. However, this difference in scale will translate to major differences in the loans available.
If you have the desire and skill to fix up your home as an owner builder, you probably already realize that you can save a lot of money by eliminating the costs of a contractor and possibly even doing some or all of the labor yourself. But, even with these costs savings, many individuals will still need to look for a loan to get it done. If your home improvement project is a smaller scale project (meaning it wouldn’t fit the category of a major rehab), you will be wasting time searching for an owner builder loan. Even though your home improvement could technically be labeled as an owner builder project, the financing for owner builder construction/ rehab is going to be tailored specifically for major tear downs, large additions, and full rehab projects.
An owner builder rehab or construction loan would typically work well for someone who is starting with a home that is not currently a livable residence. For example, you may have an old, run-down home that needs to be torn down to the foundation and re-built. In this case, if you wanted to do the work without a general contractor, you would fit well within the project guidelines for an owner builder construction loan.
Or, perhaps you have found a home that doesn’t need a full tear down but does need major rehab work. In this case, ask yourself if the extent of the needed repairs is closer to the scale of full construction than it is to the scale of smaller home improvements. If the rehab is so extensive that it feels like a full construction project, then you would probably be okay looking for owner builder financing.
So, why is owner builder financing typically set aside for larger projects only? It doesn’t seem fair until you look at it from the bank’s point of view. Owner builder projects represent the riskiest form of residential lending. Construction loans which anyone who is building a home requires are, in general, already considered a high risk mortgage. This is due to the fact that the bank is lending money without an existing home. Now, add to that risk level the fact that an owner builder loan has no requirement for a licensed general contractor. You can see easily why these mortgage products are considered risky until the home is completed.
Because of this higher risk level, an owner builder loan will have more fees and requirements. These extra costs and stipulations make these loans extremely advantageous for a borrower who is going to be building a full house without a general contractor. The cost savings of eliminating a GC far outweigh the financing costs of an owner builder construction loan. However, when the project is smaller, such as typical home improvement projects, the necessary fees and structure of an owner builder loan will begin to outweigh the overall savings to the borrower.
Therefore, if you want to be your own contractor and do the labor yourself for a home improvement project, then you will need to find financing that is tailored specifically for home improvements instead of the larger scale owner builder financing. The trick is that most home improvement loans will still require a licensed general contractor.
A couple of years ago, an owner builder who was looking for a smaller home improvement project could easily finance it with a home equity loan without having to worry about getting a home improvement loan. There was plenty of equity to go around, and the financing was cheap and easy. Nowadays, though, home equity loans are much tougher to come by. So, borrowers are forced to look for home improvement loans that are specifically designed to lend money based on the future value of the home once it’s fixed up.
This is getting tougher and tougher to find. And, if you want to do your home improvement in the style of an owner builder project (eliminating the GC to save money on labor and management costs), then you will be hard pressed to find a home improvement loan that will fit your needs. Therefore, borrowers today are turning to alternative sources of finance, such as credit cards and personal loans. With interest rates as low as they are, this may make sense. Just make sure that you fully understand the financing costs and the risks involved with the home improvement project. But, once you understand the difference between a home improvement project and a full owner builder rehab, you can at least focus your search for financing and start your project off on the right foot.