Can You Afford
It?
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.
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