How to Financially Plan for Your Home Build.
PLANNING SERIES PART 2 | HOW TO PLAN FINANCIALLY
Dreaming about your future home is easy (and fun), but when the reality of money comes into play, our dreams can start to feel far fetched. Part 2 of this Planning Series is all about getting you prepped for HOW (financially) to make your dream happen. In this early phase in your planning process, you’ll focus on collecting info so that you can make informed decisions when deciding what to build.
If you didn’t catch Part 1 of the series, you can find it here.
Today we'll cover three things:
01 - How you’ll pay for construction
02 - What you can afford
03 - What your general project budget is.
These rough numbers will get fine tuned as you continue through the planning process, but this initial stage of money planning will help you in deciding where you’re able to build, who’s the right builder for your project, and what you can build.
🌶️ Hot Tip: If you’re already feeling overwhelmed because money is scary, don’t fret. We’ve broken down the steps with an free & approachable action plan below.
Let’s start with how you’ll pay for construction & what you can afford.
Everyone’s situation and lender options are different, but we’ll cover some of the typical routes folks go.
You’ll have 3 big categories of cost:
1 - Land (pre-construction)
2 - Construction
3 - Home Financing (post-construction)
You may end up getting a loan for each of these categories, although many lenders combine these three different loans into one or two loans.
Land Loan - The trickiest of the 3, because you’re trying to buy something “raw” and potentially difficult to resell (from a lender’s POV). You’ll likely see the request for a large down payment (20% or more) with a higher interest rate in this loan.
🌶️ Hot Tip: If you’re able, try to pay cash for your land purchase. This will increase your chances of getting an accepted offer below asking as well as getting a construction loan that is more in your favor.
Construction Loan - This is a short-term loan that allows the lender to pay out the money - typically to your contractor - as each phase of construction is completed.
Home/Permanent Financing - Once your home is built, your construction loan ends and you’ll have to pay the loan off. You’ll likely have the option to choose a construction-to-permanent loan, which is when your construction loan is converted to a permanent mortgage after the house is built. Simply put, your loan becomes a traditional mortgage.
After talking to your lender about the different options they can provide, move forward with getting a pre-approval. They’ll likely want to know about your credit, income, debt, and how much cash you can put down.
Now, let’s review how to create a rough project budget.
At this stage, you’re just trying to figure out a budget in general terms so that you can make appropriate decisions when it comes to what you’ll build and who you’ll build with. As a reminder, your cost to build will become refined when these two pieces to the puzzle get nailed down. The goal is for your rough project budget to align with how much you can afford.
Our biggest suggestion for creating a rough project budget is to understand your current local cost-per-square-foot build costs, in order to have an understanding of what size home you can build. Yes, this is a very general budget - but a great starting point. We believe that these numbers should come directly from the folks who do the work - local contractors and builders. This can be a simple email or phone call to builders you’re interested in working with to understand what they’re seeing as a range of current build costs.
🌶️ Hot Tip: If this is your first time reaching out to a builder, start with a friendly introduction about you, your project goals, and why you’d like to work with them. This outreach will set the stage for a great relationship.
Our homes are built all across the country, and the range of SF costs we’ve seen is between $225 to $450 per square foot. Yep, that’s a big range depending on where you’re looking to build! This goes to show that learning about your local build costs is a very important step.
🌶️ Hot Tip:: We recommend chatting with 2-3 contractors to understand local build costs.
Don’t forget to build-in a buffer to your budget. Once you have your estimated budget, add 10-20% to that number. If you end up with extra money at the end of your project, I promise you won’t be sad about it. 🙂
Now, let's use all this info and take some action! We've created an approachable (step by step) action plan for you to understand how you’ll pay for construction, what you can afford, and what your general project budget is. Download it below!
Did you know we help folks all over the country kickstart their home building journey and find success in their build with our bespoke home plans?
Kickstart your project with our Planning Package or find your perfect (and customizable) home plan in our bespoke & sustainable home plan collection.