A dream for many would be getting to build his or her own house, with that rare occasion to mold a living space into one that is truly perfect for one’s needs and desires. Yet turning that dream into a reality involves complicated financial planning and a thorough understanding of the various stages involved. Unlike buying an existing property, constructing a new home brings with it a special set of financial obligations, more considerable than that of a mere mortgage. Entering all these levels well gives a better chance to keep a project on budget and avoids a lot of avoidable pitfalls.
Set Your Budget and Seek Financing
Your first step must be to set a realistic budget. This is actually not only the monies needed to contract your building but also to buy the land; permits for driveway, septic or sewer hookup; utilities hookup; landscaping; and a contingency fund for unforeseen circumstances, usually 10-15% of the total project cost. After you have your approximate budget, you need to seek financing.
For existing homes, traditional mortgages apply. For a new construction, you’ll normally be looking at getting a construction loan. Construction loans are broadly quite different from mortgage loans. A construction loan, which is a short-term loan with high interest rates, is meant to cover the expenses that occurred during the construction phase. Disbursements from lenders are made in draws or stages as construction proceeds and certain milestones are met (for example, foundation complete, framing up, roof on). Lenders will want to see detailed plans, a well-thought-out budget, etc. Often, the lender will require that the land be paid for outright or financed separately. When construction is complete, the construction lender, in most cases, converts the construction loan into a regular long-term mortgage, the so-called conversion or takeout financing.
Land Acquisition and Preparation Costs
The land is usually a large initial cost. Following the purchase price of the land, you then have to consider surveying, soil analysis, and perhaps clearing. Soil analyses are particularly important as they will establish if the ground is suitable for construction and might uncover a problem that could be expensive to solve. Permit fees, which considerably vary depending on jurisdiction, should also be taken into account upfront. These initial land-related costs are generally paid from the owner’s pocket or through the initial draws of a construction loan before any actual building begins.
Constructing Phases and Draw Schedules
The building of the house normally goes through so many distinct phases, much select to a “draw” from your construction loan. Arriving at this understanding is key to your financial management.
Foundations: The first big draw is for excavation, footings, and slab or basement foundation.
Framing and Rough-Ins: Then a draw occurs for the skeleton of the house, comprising walls, roof trusses, rough-in plumbing, electrical, and HVAC systems. This phase may also include the early installation of certain components such as AB windows and doors, which are essential for weatherproofing and security as the structure takes form.
Exterior Finishes: This draw pays for siding, roofing, and exterior finishes that will shelter the home from the elements further.
Interior Finishes: Funds are released in full for drywall, flooring, cabinetry, countertops, fixtures, and interior painting.
Completion and Landscaping: Punch-list items, final inspection, and initial landscaping processes will be covered by the last draw.
Each draw requires an inspection by the lender to ensure the work is completed to specification before funds are released. This protects both you and the lender.
Handling Change Orders and Contingencies
One of the most frequent ways home construction projects go over budget is modification orders – changes made to the original plans made during construction. Some changes are unforeseen and cannot be avoided, whereas, with other changes, you can almost always find a barrier against excessive modification draining your contingency funds. Your builder should be on the same page with you regarding any changes contemplated, so that you understand the cost implications before initiating changes. As has already been noted, it is important that you have a strong contingencies fund in place to cover any unexpected costs; whether from unforeseen site conditions, changes in material prices, or minor design changes.
Post-Construction Considerations and Transition
Even when the final draw is paid and you have moved in, additional financial ups and downs almost always come into play. These include puttering around for landscaping details, window treatments, furniture, and appliances that were not part of the building contract; quite possibly higher hookup fees than anticipated; and, of course, transitioning from your construction loan into a permanent mortgage, which means that understanding the terms and timing of that conversion is a priority. Property taxes, homeowner’s insurance, and maintenance costs should be counted from back when you sign on as an occupant.
Building a house is a very big decision, but with financial planning, understanding the construction loan process, and diligent expenditure control at each stage, the very good chances are that it will become a fulfilling experience that ends with the house of your dreams.
