Construction Loans - The 5 FATAL Mistakes Owner Builders make with their financing!

In the nearly 10 years I have been involved in residential finance consulting, preparing and approving residential Owner Builder construction loans I have seen examples of both the right and the wrong way to finance the construction of a home!

In my professional experience working on my own development projects I have witnessed first hand how some of the tested, tried and true financing principals when ignored can wreak havoc on a project and it's ability to create equity and/or generate a profit. And the biggest area we see this havoc is in construction loan financing and financing in general as evidenced by the turmoil with our banks and the current financial system. I would like to supply you with a shortcut to success that if applied with near religious fanaticism will produce tremendous results for you, so without further ado let's get started...

The 5 Major Mistakes to Avoid with your Construction Loan!

1. Do not spend the money from your draws on ANYTHING other than the work that was just completed! - A sure fire way to ensure the demise of your Custom Dream Home construction project is to take money from your draws and spend it on other expenses or items thinking you will replace it later!
   
   I have seen this first hand wreak pure havoc on a construction project and in 99% of the cases, this shortfall is never overcome thereby creating a major catastrophe that usually results in a work stoppage if not a total project failure! This is the ultimate construction loan sin.
   
   
2. Always include extra money for cost overrun(s), change orders or theft! - It is customary unfortunately for there to be random theft on construction sites. In some cases, one of the trades may have an errant employee who has sticky fingers, maybe some neighborhood teenage jokesters or even worse professional thieves! So be sure to have your site secured but also plan for theft.
   
   Depending on the amount of time to build your home you could have certain products that experience price increases since you started. Based on which material or product it is, the difference in the original price and the new price could be substantial!
   
   Another common occurrence is that you may need more material than your plans originally called for. This always happen when you have site-built cabinets and crown molding because most Owner Builders generally add more cabinetry and/or trim once the work is actually being done.
   
   
3. Not working with an experienced Construction Loan Expert! - Every mistake in this list has potentially fatal implications to your Custom Dream Home project and none more fatal than this one! I could share numerous horror stories however because I only have limited space, I suggest you simply take my word on this one!
   
   Construction loans are twice as tedious and difficult and they can be a nightmare for an inexperienced lender and even worse for YOU the borrower! Generally the lenders inexperience will cost you several thousand dollars at a minimum! I can't stress enough how important it is you choose to work with a Construction Loan Expert.
   
   
4. Their interest rate expires before the home has been completed! - This has a lot to do with your Custom Dream Home "Dream Team" (ie the team of construction professionals you are working with) This is so simple to avoid and between your Builder and Construction Loan Expert, this really should not be a problem. Always allow for more time than the builder says he will need.
   
   If the builder says the expected build time for your home is 5 months, I would lock my interest rate for at least 6 months or more! Although this may cost a little more in closing costs initially, it will save you money if needed and if not then you can get a pro-rated refund if you did not need the extra time!
   
   
5. Picking the wrong Construction Loan for their needs! - There are (2) primary construction loans in the marketplace so you would think it would be fairly easy to decide which loan is ideal for your situation however that is not always the case. I attribute most of this to working with inexperienced loan officers who are not specialists when it comes to construction loans and the fact that things change over the course of 5-6 months!
   
   For instance, if you have a One Time Close Construction Loan but decide that you want to access some of the equity you have in your home that would be fairly difficult to do without incurring pre-payment penalties and fees.
   
   In contrast, with a Interim Construction Loan that could be easily factored into the new loan without any hassle, extra fees or issues. So ultimately it is vitally important to spend ample time counseling with your Construction Loan Expert to make sure that you guys walk through your short and mid term goals and the best construction loan scenario for your needs.

Well there you have it in nutshell, the 5 FATAL mistakes that Owner Builders make with the construction loan financing. Do not forsake the simplicity of these tips as I have seen each one of these mistakes wreak major financial havoc on construction projects.

 Building the home of your dreams can be fun when you surround yourself with a competent team of construction experts and you have performed the proper due diligence to manage the various aspects of the Owner Builder process. Equipped with this information, you are one step closer to realizing your dream of building your very own Custom Dream Home! For FREE information on our Owner Builder Construction Loan Guide shoot an email to Tyron@MyDreamHomeforLess.com