Building Your Dream Home? Here’s What You Need to Know
Everyone wants to live in their dream home. If your dream home is not on the market, you’ll just have to build it yourself. It requires a lot of planning, budgeting, and financial flexibility, but the results are worthwhile. To make the process more manageable, here’s what you need to know before you build your dream home.
Assess Your Finances
The average single-family home costs $300,311. That includes everything from framing to finishes and major systems to materials. Note that this figure is not the same as the final sales price.
Most of us do not have $300,311 lying around. In that case, you’ll need to take out a construction loan. Lenders are cautious of construction loans, in part, because they're financing something that does not exist yet. As a result, the loans have stringent qualification standards and higher interest rates. You also have to make at least a 20 percent down payment. For this example, that means $60,062.
Building a home requires considerable financial stability. You should have ample cushion in case of any bumps in the road, like construction delays or logistical problems. If you don’t, now is the time to start saving and improve your credit score.
Making payments on time, resolving delinquent debts, and lowering your credit utilization ratio can significantly boost your purchasing power. The longer you practice these habits, the more your credit score will rise. Improving your credit will also improve your terms when getting a construction loan.
Shop Different Construction Loans
Construction loans provide money to build your home over a short term. After you complete construction, you can convert it into a permanent mortgage or reapply for a new loan. As an alternative, you can consider having the builder finance construction.
There are several different types of loans with construction-to-permanent loans being the most straightforward. A lender provides you the money. You build the home. Afterward, the lender converts the loan to a permanent mortgage.
A construction-only loan, as the name suggests, only covers the building process. These are ideal for people developing exceptionally expensive houses because they offer a large sum of money. You pay off the loan in full when construction is complete. Then, you have to find a mortgage to cover the cost of the home.
Finally, renovation loans are for people buying fixer-uppers. Specific renovation loans include unsecured personal loans and home equity lines of credit (HELOCs). The projected renovation costs are folded into the mortgage along with the purchase price, making this one of the most affordable ways to build a dream home.
The terms and structure of construction loans vary between lenders. When you qualify for a United construction loan, you receive 80 percent of the financing for construction. You have a year to build your home and only pay interest until you officially occupy the home.
Make Blueprints for the Home
A lot of effort goes into making a house a home. Once you know where you want to build, architects can design your home to your desired specifications. Here are a couple of factors to consider before and during the blueprint process:
Location – The location should fit your lifestyle and needs without maxing out the budget.
Materials – Put most of your effort into buying materials. These items will determine the look and feel of your home.
The Type of Land – The land will dictate blueprint possibilities. For instance, Texas homes rarely have basements because it’s challenging to excavate limestone. Also, check with the local land authority to see whether or not the site has encumbrances.
House Size – Consider your current family size as well as plans to grow or downsize.
Layout – Focus on getting the essential structures completed. You can always add complexities to unfinished space later.
Outdoor Space – Trees. Gardens. Landscaping. The backyard. These outdoor components should fall in line after determined the previous parts.
The blueprint is your chance to fit your home to your needs and tastes. It’s also an opportunity to gauge how much home you can afford. Talking with a United mortgage advisor can clarify your options and limitations about building a home.
Find a Qualified Builder
The keyword here is "qualified." You can start at the National Association of Home Builders, which features licensed local professionals. You can also ask a local real estate agent for recommendations or talk to neighbors with an emulation-worthy house about who built theirs.
Don’t forget to comparison shop. Gathering quotes lets you compare line items side-by-side. You can see prices, and whether builders include certain services, like job site cleanup or landscaping.
Get a list of home builder’s past and present projects. Their portfolio will give you a better sense of whether or not their aesthetic matches your style. There is no hard cut-off for what constitutes a qualified home builder. That said, people with 30 or more completed homes similar to yours are ideally suited to anticipate and resolve any potential issues.
Check the Prime Rate
Construction loans often have variable interest rates. The amount you pay will change based on the prime rate, which is the interest banks and credit unions charge to borrowers. Because it’s a federal interest rate, prime does not differ from state to state.
For the last decade, prime has fluctuated between two and nine percent. It’s in your best interest to seek a construction loan when prime is low. While it should not be the deciding factor in whether you build your dream home, it’s worth consideration.
The Bottom Line
Homeownership is a cornerstone of the American Dream. Building your dream home can be a rewarding way to recognize it. While the process requires significant time and planning, this guide will ensure you’re covered every step of the way.