Getting an owner builder loan in order to finance the work for your custom house is probably the most relevant stage in the building process and it requires a lot of preparations and paperwork.
Once you have obtained the permits and handed the related necessary documents to the loan officer, you then pick the most appropriate owner builder loan program to fit your needs. However, no matter for which solution you opt, you will still face a substantial “bill” that might bewilder you. This article will therefore try to “deconstruct” and break the borrowed sum into the component owner builder loan fees and other costs so that you can understand for what you will have to pay money back.
List of Fees in Getting the Owner Builder Loan
The clearest and most schematic “map” of your expenses when it comes to construction lending is provided by the original Good Faith Estimate (GFE), a formal document that presents all the fees incurred with such an occasion and which is filled by your loan officer at the time of the initial application. It is preferable that the loan officer complete it on the spot and by hand so that the customer has it in handwriting and with a copy which can be reviewed/consulted later. Ask the finance adviser to explain each charge clearly and consistently.
A standard sample of GFE would look like the document below:
STRATFORD FINANCIAL SERVICES
www.constructionloanexpert.com
Borrower:………………………………………
GOOD FAITH ESTIMATE
This list gives you an estimate of most of the charges due at the settlement of your owner builder loan. The figures are subject to change. They are based on a value or sales price or total build of
$ …………………….. and the proposed mortgage amount of $ ……………………………. For an explanation of these costs, please refer to the “Settlement Costs and You” booklet.
OWNER BUILDER LOAN TERMS: Construction to Permanent, stated income, owner-occupied, 30 yr-fixed, 12 month build, no prepayment penalty.
Starting payment $:…………..est. P.I.T.I. $: ………….. Interest rate: ……………. est.
801. Owner Builder Loan Origination Fee ………. pts. + $ = $ ………………………….
1303. Funding Fee $ ………………………….
1306. Owner Builder Loan Document Fee $ ………………………….
813. Tax Service Contract $ ………………………….
812. Life-of Owner Builder Loan Flood Contract $ ………………………….
815. Courier Fees $ ………………………….
803. Appraisal Fee $ ………………………….
804. Credit Report Fee (personal) $ ………………………….
804. Credit Report Fee (business-for self-employed) $ ………………………….
814. Processing Fee $ ………………………….
902. Mortgage Insurance Premium (1st year) $ ………………………….
1101. Settlement Fee (escrow or attorney fee) $ ………………………….
1108. Title Insurance Premium Includes Endorsements $ ………………………….
1201. Recording Fees $ ………………………….
815. Misc. Administration+Inspection $ ………………………….
TOTAL ESTIMATED NON-RECURRING CHARGES $ ………………………….
The following items are not fees, but may either be collected or retained at the close of escrow.
901. Prepaid interest $…………….. per day @ …….. % (30 days) $ ………………………….
1303. Interest $ ………………………….
903./1001. Insurance $ ………………………….
107./1004. Property Taxes $ ………………………….
1002. Mortgage Insurance Premium (2 months) $ ………………………….
905. Misc. $ ………………………….
TOTAL EST. RECURRING CHARGES AND/OR RETENTIONS $ ………………………….
TOTAL ESTIMATED CHARGES $ ………………………….
ESTIMATED CASH REQUIRED TO CLOSE $ ………………………….
Date ……………………………..
…………………………………………………… ………..………………………………………..
Borrower Co-Borrower
A. Owner Builder Loan Points
These represent upfront fees (each being worth 1 percent of the owner builder loan amount) charged for the following reasons:
- to generate cash which will be used to remunerate loan officers and origination departments;
- to decrease the interest rate by compensating upfront for the interest incurred by the banks when paying their investors.
Points cannot be labelled as good or detrimental. Paying more of them can be advantageous if they create significant savings and you have to carefully consult with your loan officer in order to determine which deal is best for your situation. Points are usually divided into eight fractions, listed below:
- 1⁄8 = .125
- 1⁄4 = .250
- 3⁄8 = .375
- 1⁄2 = .500
- 5⁄8 = .625
- 3⁄4 = .750
- 7⁄8 = .875
- 1 = 1.000
The system of points has a certain flexibility, depending on the owner builder loan program you have chosen. What is certain resides in that there aren’t too many owner builder loans at zero points. For this instance to happen, the creditor has to increase the interest rate so that he can pay a rebate to the originating broker or loan officer. A conventional lender will impose a number of points which will range between 0 and 3.
You will certainly want to figure out whether the option based on points is a better deal than the one that has only interest rates. To do that, use the following algorithm:
- Calculate the loan amount times the points on each owner builder loan;
- Multiply the loan amounts by .6 in order to determine the amount of owner builder loan that will be used during construction;
- Multiply the result from step 2 by the offered interest rate;
- Add the points and the interest;
- The owner builder loan with the lower total is the best deal.
Most of the experienced and knowledgeable mortgage brokers would want to get at least 1.5 to 2 points on an owner builder loan. If you want to negotiate, do it upfront rather than wait until the broker does his work. It would be unethical of you, especially if he is charging what he disclosed at the beginning. In case he failed to deliver what he promised, then negotiations are acceptable.
To avoid being overcharged, negotiate upfront because most mortgage brokers appreciate this approach. And since they are required to disclose their fees by law, you can take advantage of that and make sure they are making good on their part of the deal.
B. Escrow and Title Insurance Fees
When examining the GFE, one could notice that the differences between the rates that various lenders charge for escrow and title services are quite significant. Identifying these variations help you eliminate the loan officers who are in fact amateurs and less informed about construction lending. Regulated by the Real Estate and Settlement Procedures Act (RESPA), the title and escrow fees for an owner builder loan are generally higher than the same fees for a purchase or refinance owner builder loan because of the additional risk assumed and the added volume of work that is involved.
The risk to which reference was earlier made comes from the possibility of a mechanic’s lien to be filed. These liens are legal complains through which contractors and subcontractor can recoup their money if you don’t pay for their work by making a claim against your property. One of the responsibilities of a title company is to protect its customer against such occurrences, otherwise the lender won’t approve the owner builder loan. In conclusion, the escrow and title fees for an owner builder loan are more expensive than the ones from other types of owner builder loans, but they are justified.
C. Appraisal Fees
Just as in the above case, the appraisals obtained for an owner builder loan are more expensive than the ones necessary for a purchase or refinance owner builder loan. Since the former type of assessment is done based on plans and specifications, which is harder than doing it on a house that is already built, the task takes more time and costs up to 25% more than conventional appraisals. Moreover, the appraiser of a custom house has to find similar properties against which to compare home values, which is another difficult assignment.
Seeing that most lenders consider the appraisal as the basic piece of information on which the decision to offer or not an owner builder loan depends, this evaluation has to be thoroughly carried out. The creditor may have it desk or field reviewed. In the former case, a reviewer checks the information provided by the appraiser via online media and it is usually free of charge. The latter, on the other hand, implies that another appraiser be sent to the property and asked to state an opinion, which costs the client an additional fee.
As a valuable piece of advice regarding this section, custom house clients are suggested not to hurry in ordering their appraisals too early in the process of borrowing money for the construction project. Valid only for 90 days, they can expire until the time your lender requires it, which will force you to pay another $150 to $250 for an extension.
Furthermore, this evaluation has to be in your lender’s name and, if you don’t get the owner builder loan and resort to another creditor, you will need to pay for a retype. Appraisers are usually loyal to their lenders and refuse to release the assessment made by them. You can threat them with legal action, but a retype is cheaper than a litigation.
D. Insurance Costs
The expenses generated by an owner builder loan also include the cost of insurance. If you don’t act as your own contractor, then you need to pay for an insurance policy at the close of the escrow. Called the course of construction policy, it pays for any damage that occurs to your property during the build period and has to be in place before the lender funds the owner builder loan. The overall price can range from $1,500 to $3,500.
E. Miscellaneous Expenditures
Last but not least, “garbage” or “junk” fees are the ones charged by various parties involved in the process. These are:
- Administration and inspection fee – covering the costs of inspections and wire transfers every time you take money during the owner builder loan; it is usually $700 to $1,000.
- Credit report – required by each lender to whom you resort from a credit reporting agency such as Experian; these fees are usually less than $50 for all three bureau reports;
- Documents – generated by the lenders’ subscription to document software services that are designed to prepare the owner builder loan documents for signing; they roughly amount up to $175;
- Flood certification – incurred by the lender’s request to know whether your property is situated in a flood zone in order to determine if a special flood insurance is needed; it is usually worth $15;
- Funding and underwriting – generally referring to $400-700 worth administrative fees within the lender’s particular branch.
- Messenger fees – paid for the paper exchange and shuffles from the broker to the lender, from the lender to escrow, from escrow back to the lender, and much more; they can range from $50 to $100;
- Processing – fees charged by mortgage brokers to cover their administrative costs because most of the points go to loan officer commissions; figure $350 to $500;
- Recording – the owner builder loan supporting paperwork includes several documents that have to be recorded with the county, such as the trust deed securing the property, as well as the owner builder loan agreement; a rough estimation is around $100;
- Tax service – it furnishes the proof that the borrower is paying his property taxes on time to ensure the lender that the property is not claimed, attached (legally taken) and sold at auction by the government; this service is provided by independent companies for $65;
- Wire transfer – expenditures that cover the lender’s fund wiring to the title company at closing; the use of the federal wire transfer system costs approximately $25.
These are the main costs that will occur throughout the process of getting an owner builder loan for your future custom house, being about a considerable amount of money and this is why you need to thoroughly manage your financials.