4 Steps for Financing Your New Home
August 22, 2014
Building a new home can be more complicated financially than buying an existing home, and it’s easy to be intimidated by the process. However, moving into a home that was designed to suit your lifestyle and needs is well worth it and the return on your investment can be high. The main difference comes from purchasing a home with a set price to estimating, creating a budget for, and receiving financing on something that does not yet exist.
The key to successful budgeting and financing for your new home construction is to work closely with a reputable contractor and your lender. Open communication with your contractor will help you create a realistic budget and understand exactly where your money is going. North Twin Builders explains the 4 steps of financing your new home construction to help you get started on building your dream home.
1. Create a Realistic Budget
Many construction financers cite an unrealistic budget as the most common barrier for building a new custom home. Your first step should be to sit down and determine how much you can afford to spend for your new home. Look at your income and debt to figure out what size monthly payments you will be able to afford.
After you have determined a reasonable monthly payment, spend some time researching the potential costs of building your new home. This should be broken down between the cost of the land, preparing the site and building plans, actual construction of the home, and the finishing and furnishing of your new home. Make sure to leave some room for contingencies – professionals recommend having a contingency fund that equals between 10 and 20% of the project for such things as unexpected problems, changes in the design, or upgrading materials or appliances.
If you choose a quality contractor early on in the process, they can help you with this. For example, you may have a land lot in mind that will require extra preparation and initial expenses that you didn’t expect. A good contractor with site planning experience can point out things like this, helping you to create a more realistic initial budget. On the other hand, beware contractors who lowball estimates – you don’t want to be surprised by underhanded raises in the prices later on!
2. Shop Around for Financing
Not all construction loans are equal, and it’s important to shop around for the financing that will work best for your circumstances. Construction loans are different from regular mortgage loans, in that they are set for short period of time (generally about a year, based on the projected construction timeline), pay out over time, and typically have a higher interest rate.
There are two options for construction loans, the 1-step loan or the 2-step. 1-step loans roll automatically into a mortgage loan following completion of the project, with both being provided by the same lender. This requires only one approval and one signing, and can save you the cost of additional closing fees. 2-step loans allow for more flexibility, and are most useful when building a custom home where expenses and timelines may change. This also gives you the option to choose a different lender for your final mortgage.
3. Finalize your Construction Financing
Before you can close on your new home construction loan, your bank will want a signed contract with your builder. This should include detailed expenses and predicted start and completion dates. Your financing agent will consider your employment, credit score, debt-to-income ratio and the future value of your new home. Because value can be difficult to determine on something that does not yet exist, your bank may require an appraisal to be completed by an independent appraiser.
Once you are approved for a new construction loan, your bank acts like a credit card. They give you an amount that you can go up to, and then make periodic payments out to your contractor. Most such loans only require you to pay interest on the money that is actually spent, which helps you avoid paying for two homes at once during the construction process.
4. Stick to your Construction Budget
The most important part of your new home financing should be sticking to the budget. This is why it is so important to have a detailed plan laid out and design and material decisions made before seeking financing. Your lender will make all the payments necessary, but only to a certain amount. Leaving room for a contingency fund can help you stick to the budget, but many soon-to-be new home owners get excited and request differentmaterials last minute or want to upgrade an appliance or even add a room. These changes to the plan can add up quickly, causing your new home project to go over budget.
The key to sticking to your budget while still enjoying the building process is to prioritize your goals. If you decide half way through the project that you would like to upgrade to higher quality windows or hardwood flooring, you must find a way to offset that budget increase. Again, choosing a quality contractor will make all of the difference because real professionals will work with you to meet your budget, and will communicate expenses openly while finding affordable solutions.
North Twin Builders – Your Vilas County Quality Home Contractor
When you choose North Twin Builders for your new home construction project, you get the reassurance of working with a custom home builder that cares about your budget and your vision. With our decades of experience and building science knowledge, we can often make suggestions to improve on the design that will fit your budget and even save you money in the long run. North Twin Builders can build your new home economically without sacrificing your comfort!