One of the first steps for a homebuyer in the building process is to analyze your financial situation and find out how much money you'll have available for the construction and purchase of your new home. It's usually a wise move to make some preliminary financial arrangements before you begin interviewing builders or architects and before you purchase a site for your home. Without your budget in mind, you won't be in a good position to make those other important decisions.
Loan requirements
Ask lenders to explain the loan programs they offer. Loans and qualification requirements constantly change, so it's important to find out what options are available to you. Some buyers are surprised to discover they can qualify for a larger mortgage than they thought they would be able to obtain. Others are saddened to learn their dream home is financially out of reach, at least for a while.
Check your credit report
Before you begin consulting lenders, get a current copy of your credit report and address any errors or negative ratings on it. Cleaning up your report ahead of time will position you in the best position to borrow money. Be prepared to explain any derogatory information in writing.
Pre-qualify for a mortgage
Ask at least one lender to pre-qualify you for a loan. The lender will ask you questions about your income, your debts and your credit history, then use that information to give you a reasonably reliable estimate of your borrowing potential. Pre-qualification usually is free and doesn't obligate you to obtain a loan from the lender, nor does it obligate the lender to provide a mortgage for you. Withholding information from the lender isn't in your best interest because whatever is not revealed almost always will be uncovered when you submit your formal loan application.
After the lender gives you an estimate of your borrowing power, sit back and assess your own comfort level. There is no reason why you must borrow the maximum amount for which you can qualify. Take a good look at how much you are willing to sacrifice in order to afford your new home.
How much cash?
The total amount of money you'll need at hand to build your new home depends in part on the scope of the project. For a production or tract home, the amount of money you'll need to get started isn't much more or much less than you'd need to purchase an existing resale home. Generally, a small deposit may be the extent of what's initially required. For a custom-home, you'll need a substantial amount of cash prior to obtaining your construction financing. Builders suggest budgeting at least $6,000 to $15,000, depending on the anticipated size of your home. These up-front expenses are part of the total project cost and often can be reimbursed to you in your construction loan or considered to be part of your down payment.
The building process involves a number of expenses you'll incur before your construction financing becomes available. These expenses might include a deposit on purchasing your lot, preparation of the plans and specifications for building, site engineering, various government building fees, loan application fees and a deposit on the builder's services or any preliminary fees payable to the builder.
Down payment
Many builders require a down payment of at least 10 percent of the total cost for a custom or semi-custom home. Sources of down payment funds might include equity that has accumulated in your current home, savings, down payment assistance, other liquid investments, equity in the lot for your new home (if it has already has been purchased) or other investments that will be liquidated prior to the start of construction.
If the equity in your existing home will be the main source of your down payment on your new home, you probably will want to obtain a realistic estimate of the market value of your home and how long it might take to sell your home. Interview several qualified real estate agents who are familiar with your neighborhood and ask each to give you a comparative market analysis for your home. Selling your current home before building begins on your new home can be very helpful even though you may have to move twice. Trying to time the sale of your current home to coincide with the completion of your new home can be nearly impossible and extremely stressful.
Setting a budget
During the design and construction stages of building your new home, you'll be presented with many opportunities to upgrade every component from the windows to the cabinet hardware. Having cash reserves or additional borrowing capacity will enable you to include those upgrades that will make your home special for you. If you "max out" your budget on the basic home, every decision about options and upgrades will be difficult.
Setting a realistic budget is one of the most important steps in the home-building process. Approaching budget constraints carefully can help set the stage for a rewarding home-building experience. |
