Financing

Tips to Stay Within your Building Allowance

Custom home by Brock Builders

Custom home by Brock Builders

Whether building a new home from a stock plan or working with a custom home architect, staying in budget is what homeowners aim for most. Although most general contractors will provide a building allowance, not all builders explain what is covered in the construction budget and leave many homeowners confused about what they are actually allowed to choose for their home. Settling for the cheapest bottom line and not comparing allowances from builder to builder often leaves the homeowner with a higher price tag in the end, or less than satisfactory products and finishes in the home. With a few simple steps and questions however, building a house on a budget is not as hard as it seems.

While the term budget can often sound restricting, in new home terms it is meant to identify the bottom line, or implied total cost of building your home. A construction allowance shows more than just the final cost. It should include several components that allow homeowner and builder to agree on the number at the bottom and the products in the end result. Many new homeowners make the tragic error of wanting one number on the receipt but don’t understand how the building allowance works. Before signing on the dotted line, consider the following points:

Don’t buy more house than you can afford.
While this may seem obvious, several new homeowners find themselves building a larger home than they can afford only to run out of money for allowances. If your entire construction budget is spent on the dwelling itself, there is typically not much money left over for upgrades or high-end products and the homeowners are left unsatisfied. Too much house often equals too little money for the finishing touches.

Talk with your builder about your wants before signing any contracts.
A good builder or general contractor will listen to your wants and needs before creating the new home allowance. Discuss what you envision the home will look like. Remember, adding a couple of square feet here and there or switching tile for hardwoods can translate to thousands of dollars in unforeseen upgrades.

Visit wholesalers to see if your choices are available.
You may prefer granite countertops, but your building allowance only calls for laminate. Often times in the construction budget breakdown, the builder’s preferred vendors or stores are available for you to visit and make sure for yourself that the products you anticipate wanting in your new home are in fact part of what you’re paying for upfront.

Spend money now on the products that will cost more to install later.
Products such as tile work, hardwoods, fireplace surrounds and cabinetry can be expensive to upgrade, however they are even more expensive to install at a later date. There are hidden costs in removing, stripping, replacing all of these products, not to mention costs for installation. It makes sense to spend the money now to have them done, rather than pay someone later. After the move in, less costly items such as light fixtures, towel bars, and drawer pulls can be upgraded and installed as time and money permit.

Remember, the most important thing when trying to stay within your new home allowance is to do as much research upfront and talk with your builder about the types of products you envision in the home. Simple conversations in the beginning can result in thousands of dollars saved in the end.

Financing the Construction of Your Custom Home

Monday, June 15th, 2009 | Custom Home Construction, Financing | 3 Comments
Custom home by Brock Builders under construction

Custom home by Brock Builders under construction

You’ve probably already done your research and know there are more good reasons for building a custom home, than buying one.  The leading financial one being the considerable equity you can earn – instantly, from the moment you move in.  However, you may not be as comfortable with the “ins” and “outs” of how to finance the construction of your dream home.

Firstly, financing your own custom home does not have to be fiscal headache.  In fact, you’ll be happy to hear, it’s a pretty straightforward process.  The first thing you’ll need to do is obtain financing from either a bank, or mortgage lender.  Instead of applying for a conventional home loan, you’ll need to fill out an application for a “Construction Loan.”  Generally, the requirements include a minimum FICO score of 650 and a combined income of at least $45,000 for married couples.  Also, be sure to ask if the loan can roll over into a permanent mortgage upon completion of the house.  Many mortgage lenders offer hybrid loan packages for construction of custom homes.  Once you’ve done this, it’s time to consider your requirements, and budget… things like number of bedrooms, baths, etc.

Tip: it’s all in the details.  Not only does square footage play in an important part in cost, but so do seemingly small things like the number of windows, or type of bathroom fixtures.  Also, be aware, most builders charge more per square foot  for smaller homes.  Meaning the larger the home, the less you’ll pay in labor costs per square foot.

Location, location, location.  If you haven’t already found your ideal lot, consult with a real estate broker to find a suitable location.  (The broker should specialize in land sales, not just houses).   You should also be sure to have a pre-construction appraisal carried out by an experienced appraiser.  You need to ensure that the land is, in fact, worth what you’re paying for it.

Next, you’ll need to consult with a good custom home builder to determine a budget.  The budget should encapsulate the land purchase, finance charges, materials,  and labor costs that will be incurred.  Let’s assume that the breakdown looks something like this:  land cost $65,000, finance charges $15,000, materials $80,000, and labor costs $70,000.  The total budget would come to $230,000 (assuming you qualify for 100% financing).

Tip:  it’s a good idea to plan on staying 10-15% below your total budget. This will help you cover unexpected costs, and ensure that you stay on plan.  Also, keep in mind time-frame when planning your project.  Inflation can rise as much as 6% per year, so if you’re not planning on building for a year or more, be sure to factor it in. Once the numbers have been crunched, you’re ready to break ground!

Finally, once your custom home is completed you’ll want to have a second appraisal done.  This will determine the final value, or “fair market value”,  of your new finished home.  Let’s assume that the appraisal comes back at $285,000.  Now, deduct $230,000 from $285,000 and you’ll find you’ve gained an equity of $55,000, or 24% – instantly! Home sweet home, indeed.

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