construction loan

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.

Tags: , ,