After owner builders work their way through the maze of owner builder construction loan qualifying, it will be time to close on the loan. This is essentially where you sit down and sign a huge stack of documents that you will never read, or understand if you try.
Basically, this is where the owner builder loan promises to give you the money, and you promise to repay it. Sounds simple, but it will take a hundred or so pages to accomplish it.
Owner builders are typically free to choose any closing agent to conduct the closing. In most states, owner builders can choose either an attorney or a title company to perform this function. Some states require you to use an attorney.
Once you sign all the documents, the closing agent still must record them with the county registrar, making the owner builder construction loan official. This is usually the day after your signing.
During construction, as an owner builder requests specific loan draws, the lender will most likely request the closing agent to do periodic updates of the title to make sure no liens have been filed to date.
Most good owner builder construction loans are one-time-close, construction to permanent loans. Once you are finished building, there are no more closings to convert to your permanent mortgage. At this point most lenders simply send you a final loan agreement with the final loan amount and interest rate and terms for your signature. There should be no need to go back to the closing agent again for a second round of document signing if the owner builder loan is set up properly.
Owner builder loan closing costs typically consist of three components: broker/lender fees, loan fees, and third party fees. Remember two things about closing costs when considering owner builder financing.
First, closing costs for construction loans, in general, and owner builder construction loans, especially, are going to be slightly higher than costs for a plain purchase or refinance mortgage. Accept this and shop for the loan that best fits your needs. Do not waste your time looking for an owner builder construction loan that has the same terms as the refinance loan you did two years ago. Do not try to compare apples to pineapples.
Second, just because an owner builder construction loan has slightly higher costs does not mean that it is not a great deal. Remember the big picture. You are considering being your own contractor to build the exact home of your dreams and save tens of thousands of dollars doing so.
If your research shows that you can save, for example, $65,000 by being an owner builder, is it no longer a great deal if you only save $63,000? How about $58,000? $53,000? Realize that you are still saving a ton of money while building your dream home, despite the slightly higher financing fees that come with owner builder loans.
Brokers earn their income on owner builder loans by charging origination fees for their service. This is a percentage, called "points," of the loan amount. One point equals one percent of the loan amount. By charging an origination fee, the broker is able to give you access to a lender's wholesale rates. The broker is also able to represent you and your best interests by offering access to a variety of loan programs.
Working directly with a lender is also occasionally an option. Direct lenders are typically compensated the same way as a broker; by charging points.
Perhaps the best option is working with an organization that has expertise in owner builder loans, that is a direct lender, and that also has the option of acting as a broker when needed. This will give you the best of both worlds while ensuring you are working with a specialist.
The number of points you should expect to pay will vary by loan program and lender. For very specialized loans such as owner builder construction loans, it is common to pay approximately two to three points in total fees. This is a small price to pay for access to a program that will allow you to save tens of thousands of dollars while building the home of your dreams.
In addition to broker or lender fees, your loan's closing costs will include loan fees. These fees include items such as underwriting, document preparation, draw administration, loan processing and a variety of the other small fees. For a construction to permanent loan (remember you are getting two closings in one), expect to pay approximately a half to one percent of your loan amount in total for these fees. Most of these fees are fixed amounts, so the percentage will be higher for lower loan amounts.
The third component of your owner builder closing costs are made up of things the lender or broker has no control over, hence the name "third party" fees. Third party fees are also, for the most part, not affected by the type of loan you choose. They are, however, influenced by the size of the loan. Third party fees consist of your closing agent's fees, title search and title insurance fees, recording fees to the state, county or locality and any state or local taxes. Most of these items are set by the state and local governments and are simply the price of buying or owning a home in that area.
All told, owner builders can reasonably expect to pay approximately two and a half to four percent of their construction loan amount in closing costs. Some states may have high transfer taxes, excessive title insurance fees or other high state or local fees that will increase your costs.
Overall, the total closing costs are not bad when you consider you are closing on two loans in one and being given a loan to undertake a process most lenders consider extremely risky. Plus, owner builders get to build their dream home while saving tens of thousands of dollars.
