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Understandably, owner-builder construction loans tend to be document-heavy. In addition to the standard forms and disclosures, lenders require borrowers to provide them with copies of the following items for loan underwriting and evaluation:
Warranty deed and title-insurance policy on land/lot or the land-purchase contract. Most do-it-yourself borrowers already own their lot at the time of application. The lot equity can be used as their down payment;
Construction-cost breakdown. This lists all costs associated with the proposed project and used to establish the construction-loan budget with the lender;
Building plans; and
"Subject to completion" appraisal of the proposed project, including the lot's current value.
In addition to traditional borrow-er underwriting, two risk factors are integral to the evaluation process by owner-builder construction lenders:
Construction loans themselves are typically riskier for lenders than standard purchase or refinance mortgages because no asset (completed home) exists at the time of underwriting.
Owner-builder loans are riskier than standard construction loans because a lender must evaluate the borrowers' abilities to effectively manage the broad range of project-oversight responsibilities associated with coordinating subcontractors, suppliers and regulatory agencies, as well as budgeting and quality control. Further, they must do so in the context of a defined cost breakdown.
Loan-servicing costs tend to be higher for owner-builder loans, especially when the availability of an unlimited-construction-draw program is factored in. This system benefits the borrower significantly, but it is expensive for a lender to administer (given the large number of draws per loan).
Benefits to mortgage professionals
Despite the time and effort required, you can now provide construction financing to clients who you might have previously turned away. Further, you can handle their permanent financing when the projects are completed.
Generally, lenders will allow referring mortgage brokers to collect a front-end fee for the construction financing (usually as much as 1 percent of the loan amount), and you can collect your standard fees for providing permanent financing.
This is an excellent way to diversify your mortgage business, especially as refinance opportunities come and go.
Jeff Lammers and Bob O'Mara are co-founders and principal officers of Marketrend Mortgage Network LLC, which specializes in originating residential construction loans, especially for individuals wishing to serve as their own general contractors. Marketrend provides borrowers, referred by mortgage brokers and lenders, access to contemporary and competitive owner-builder construction-loan programs. Visit the company's Web site at www.marketrendmortgage.com. To reach Lammers, call (727) 538-7745 or e-mail firstname.lastname@example.org. To reach O'Mara, call (727) 538-7706 or e-mail email@example.com.
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