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Building a new house is a bit different than securing funds for an existing structure. You’ll need a construction loan to start, which is separate from a regular mortgage. Preparing for the financial steps to building a new house can save you time and energy throughout a long but rewarding process.
According to the National Association of Home Builders, it’s about $154 per square foot to build a custom home and only $123 per square foot to buy an existing one. Some of the advantages of building include having a home exactly the way you want it.
If you’ve chosen to start from scratch, here are the financial steps you’ll need to take.
1. Buy Land
Unless you’re working with a builder who has lots in a neighborhood and will roll everything into one package, you’ll need to secure a location to build your home. It may be best to buy the property outright and secure a construction loan separately. You could also take out a loan for some acreage, but be sure your finances can cover everything, and you’ll still qualify for the funds needed to build.
2. Pay Off Debt
According to Forbes, construction loans are harder to qualify for because of their flexibility. You’ll need a credit score of at least 680. Pay off any debt, make payments on time and do everything in your power to get your score as high as possible so you’ll qualify for the loan.
3. Save a Downpayment
You should also save 20% of what you think the final cost will be. Again, construction loans are a bit trickier. In addition to a high credit score, they often require a substantial down payment. Start saving now so you’ll have the necessary money to secure the funding to build your dream home.
4. Create a Project Timetable
Most banks want to see a timeline of when each phase completes. Work with your builder to set dates and projections to share with your loan officer. With a construction loan, the lender releases the money in increments, so the timetable lets the bank see you’re on track and pay as the builder completes projects. The process also protects you from a builder who takes your cash and never finishes the house.
5. Present a Budget Blueprint
Your builder will work with you to present the types of materials used in construction and how much each element costs. A budget should look at options in case expenses run over and show you’ve thought through different scenarios. The more detailed your blueprint, the easier it is for the lender to make a decision.
6. Shop Around
Consider how much the interest rates are, how the money gets released and how easy it is to convert to a traditional mortgage. Choose a lender meeting your needs. Each building project is unique. Your builder may have suggestions about the best bank to use for a particular project.
7. Choose a Qualified Builder
Your builder should be bonded and licensed for your area. Check with your local building and zoning to find out requirements and how to make sure the person you hire has them. Ask for references. Check for complaints.
Make sure they have plenty of experience building other homes. You may find it harder to secure financing if the bank isn’t sure about the person doing the work on the house. Their job is to protect their investment in case you default, and they have to sell the property. They don’t want to risk shoddy or uninhabitable workmanship.
8. Look at Bridge Loans
If you already own land or a dwelling, talk to the lender about a bridge loan to help grab equity out of your current residence to start on the new one. The solution is meant to be temporary, so you can get started on the process and then secure long-term financing. Keep in mind the interest rates for bridge loans are often much higher, so you’ll want to convert it as quickly as possible to save money.
Prepare for These Financial Steps to Building a House
During the building process, you’ll run over on costs, and things will go wrong. Add a little cushion into your budget to account for whatever you didn’t plan. Securing financing to build your own home is a bit more complicated than a traditional mortgage, but you’ll wind up with a place perfectly suited to your needs and feels like home.