Building your own house presents multiple challenges

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Ask a Lender
October 3, 2016 | Updated September 18, 2017


Key Points

Owner-builder considerations

  • Owner-builders need to create a construction budget and schedule before securing financing.
  • Nonlicensed owner-builders may pay more for financing and subcontractors.
  • Managing a work site requires knowledge of building codes and safety standards.
  • Owner-builders must manage the financing to keep the project moving forward.

For most people, building their own home means hiring a licensed general contractor to build a home for them. They may actually select and purchase the lot, secure financing for the construction and make decisions about house design and amenities, but they leave everything else to the contractor. The contractor, in turn, gets paid to manage the actual construction of the house from beginning to end, and this fee can account for as much as 25 percent of the cost of a home.

For some, however, building their own home means doing the actual work, or at least supervising the work. Some want the satisfaction of living in a home built with their own two hands, while others simply want to spend sweat equity instead of paying a contractor, thus saving money they can then invest back into the home. Whichever route you choose, you will likely need a home construction lender.

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How to get an owner-builder construction loan

Being an owner-builder is not an easy task, however, especially if you have little experience in large-scale construction projects. To begin with, some construction lenders and even subcontractors will not work with unlicensed owner-builders. Not only can this make it more difficult to find financing and hire plumbers, electricians and roofers, it may mean you end up paying higher interest rates for financing and higher fees for subcontractors. This can eat into the cost-savings of your sweat equity.

If you are determined to be an owner-builder, start by determining your budget and creating a construction schedule. You will need both to secure financing. The budget should include all building materials (including structural and finishing materials), general labor costs, subcontractor fees, the cost of clearing and preparing the lot, building-permit fees, landscaping costs and insurance premiums — because you will be liable if anyone is injured on the job site. You will need to do a lot of research to get your budget numbers correct, because overestimating or underestimating your budget can cost you when it comes to securing financing for the project.

Your schedule must take into consideration possible delays due to permit issues, availability of labor and subcontractors, weather issues or other unforeseen circumstances. Construction loans have short terms — typically 12 months — which should be enough time to complete construction. These loans must be paid off completely at the end of the term, however, which is normally done by securing a conventional mortgage. If your house is not completed by the end of 12 months, you may have to renegotiate the construction loan, which can be expensive.

What should I plan for in the construction process?

If you are managing the worksite, you will need to be on-hand during construction to keep laborers and subcontractors on task and on schedule, and to deal with any issues that arise during the build. You will need to ensure your house meets all local building codes to avoid additional costs to correct issues found by inspectors, and you will also need to make certain that safety standards are being met on the job site.

Your job does not end when you leave the construction site, either. As an owner-builder, you will have to order supplies and materials and pay workers and subcontractors on a timely basis. This means you will need to manage the financing and the draws from your construction loan to make sure you have enough funds to pay your bills and wages to keep construction moving forward. Depending on local and state laws, you may even need to set yourself up as an employer, which means dealing with tax withholding for your "employees."

At the end of the process, you may well feel a sense of accomplishment from building your own home, but you also may better understand the worth of a good general contractor.

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