Owner builder insurance and warranty: what the lender needs

Also called construction insurance or builder's risk, it covers the partly built home, materials on site and in transit, and the site itself against fire, storm, theft, vandalism and accidental damage during the build. Lenders require it because their security is a structure that is not yet complete and is vulnerable. The policy should be in your name as owner builder, note the lender as mortgagee, and run for the full construction period plus a buffer. Lapsed cover is a standard reason lenders stop draws.

Public liability covers injury or damage to third parties, including trades and visitors on site, and lenders typically want $10 million to $20 million of cover. Depending on the state and how you engage trades, you may also need workers compensation cover for employees or personal accident cover for yourself and contractors you engage directly. State owner builder regulators set out what applies, and the lender expects the certificates to be in the file.

Licensed builders must take out home warranty insurance, which protects the owner if the builder dies, disappears or becomes insolvent and, in most states, covers defective work for a period. Owner builders cannot buy it because they are the builder. That means the lender has no fallback if the build stalls, and it means that when you sell, state law requires you to either obtain an owner builder warranty policy or, in states where none is available, include a statutory warning in the contract for sale for a set period, typically six to seven and a half years. Buyers and their lenders notice it, which can affect resale.

On completion the contract works policy ends and a standard home and contents or landlord policy takes over, which the lender also requires. Structural defects in your own work are not insured, which is a reason to keep records of who did what and to use licensed trades for licensed work.