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What Should an Owner Builder Expect to Pay in Closing Costs for His Loan?

When looking to build your home as an owner builder, you will undoubtedly want to compare loan programs and closing costs. If you want an owner builder construction loan, you will need to make sure you are comparing apples to apples when looking at overall loan fees. A specialized owner builder loan will have more fees than simpler mortgages, but it should be worth it in the long run.

An owner builder construction loan will typically have more fees associated with in as compared to simpler types of loan products, such as purchase loans or refinance loans. These loan fees are often paid in terms of points. In the financing industry, one point equals one percent of the loan amount. Therefore, if your owner builder loan has three points in the closing costs, then that would equal a total of 3 percent of your loan amount.

Points come in all shapes and colors. For example, you are probably familiar with origination points or even perhaps discount points. However, your owner builder loan may have a point or two as a straight owner builder loan fee. The truth is that it doesn't really matter what the name or title of the fee is. A point is a point. And, when you're shopping for the best rates and terms, it doesn't matter to you what the loan program calls the fee. What really matters is the total amount and whether or not the program is worth it.

Overall, an owner builder construction loan will have one to two points more than a simple purchase or refinance loan. And, an owner builder loan will typically have more points than a standard construction loan that requires a fully approved general contractor. So, the question to ask yourself is whether these higher fees (or points) are worth the trouble.

If your owner builder construction loan is structured properly, then the answer should be a resounding yes. First of all, the loan should be a construction-to-permanent loan, sometimes called a one-time-close program. This means that your owner builder loan will have just one closing to cover the purchase of the land, the construction phase, and the conversion to the permanent loan. Suddenly, these slightly higher fees are spread over three loan phases and prove to be more than reasonable.

Second, your owner builder construction loan should allow you to be your own general contractor without any requirements for a site supervisor or project manager. You should be allowed to hire whomever you want to supply labor and materials. In this way, you can save a ton of money by cutting out the costs of a general contractor and hiring the best sub-contractors for materials and labor. If an owner builder does this, then he will save anywhere from 15% to 40% in sweat equity in his home. Isn't this savings worth an extra 1% to 2% in financing fees?

Lastly, an owner builder construction loan should wrap as much of the closing costs into the financing as possible. This way, you won't necessarily have to pay your closing costs out of pocket. The amount of closing costs that can be wrapped into the loan amount will depend largely on the qualifications of the borrower of course. For instance, your credit score, your debt-to-income ratio, your property's appraised value, and any equity you have in your current home will all be large factors in the owner builder loan's rates and terms.

In general, though, expect your owner builder construction loan to have higher fees or points associated with it than you would expect from a simple purchase or refinance loan. It makes sense when you consider that a construction loan is a riskier mortgage product than a loan on a home that already exists. And, it really makes sense when you consider an owner builder loan will allow you to build a house without an approved, licensed general contractor. But, overall, as an owner builder, it should be well worth it to you if your loan program allows you to 1) avoid multiple closings, 2) save 15% to 40% in instant sweat equity, and 3) wrap some or all of the closing costs into the loan amount.

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