How to prepare your finances to build a custom home.
EDUCATION
It is very easy to get caught up in the fun and creative parts of planning to build your new home. You can spend hours a day watching videos, glued to pinterest and various magazines. One of the most important impacts on how much home you can afford and much much you can will get for your money--will be your finances. I highly recommend that everyone invest a certain amount of time working on the numbers. Have you heard the expression, “the numbers don’t lie?” Well, it is true.
I have created a list of 5 areas that are related to the numbers...the money...the cash.
Credit It is important to understand your credit. If you are not currently monitoring your credit on a weekly or monthly basis, I highly recommend that you start. You want to make sure your credit utilization is under 30% and your middle credit score is well over 720. This will allow you to access the best loan products and interest rates. In addition, your monthly payments will impact how much money you can borrow. Keep your balances low and payments made on time. Finally, you don’t want negative items to creep up when you are in the process of applying or closing on your mortgage. This could be a deal killer. If you have unsettled debts no matter how small, make sure you reach out to the creditors before it’s too late. Did you switch cable providers, cell phone companies or even recent apartment complex that you vacated? Make sure you have no outstanding debts that may post to your credit report when you least expect it.
Cash Reserves Money makes the world go around. You will need cash in order to build a custom home. Even if you own the land and plan on rolling your closing costs into your mortgage. It is common in some cases to cover soft costs like permits, electrical and water hookups in advance. Furthermore, you will have to pay your architect, designer, and additional services upfront. There are cases where you can roll these into your loan, but many of the soft costs incurred prior to the first draw dispersal will have to come from you. If you are basically buying a home from the builder, the numbers will vary. As a rule of thumb, I suggest that you have a minimum of your 6 month emergency fund to live your normal life and 5% of the total budget of your project in cash ready to access. These funds should not be one in the same. Your lender may require additional cash reserves to close on your loan.
Prequalify and research loan programs in your area. It is important that you spend some time learning about all the options that are available in your area. Every bank may not have the same product. There are many programs and grants within rural communities and urban areas to encourage growth and development. These programs may impact where you want to build and how much you spend. When you have a clear understanding of all the loan programs that are available, you are prepared to make the best financial decisions.
Research the cost of options and upgrades It is important to understand what things cost. I encourage people to visit new construction model homes. Get copies of their price sheets and updates if possible. You can also visit kitchen and bathroom showrooms, tile and slab yards, and lighting gallery for additional intel. You want to have an idea what things cost, you will be prepared to understand your allowances and proposed budgets that will come from your builder. If you have a clear understanding of the cost of the types of vanities you want in the master bathroom, but your builder is pricing out 4 bathrooms for what you know 1 bathroom will cost...you are ahead of the game. You can address these discrepancies before the construction begins. I have a great blog post about allowances. I encourage you to read more by clicking here.
Research your local real estate market While everyone wants a house that is unique to their taste and lifestyle--it is important to understand trends and sales records in your area. Even if you think this will be your forever home, you don’t want to create a house that is so off the mark for your market that no one would be interested in purchasing should you need to sell. Also consider architectural style, size, finishes, in addition to the prices. You might think twice about a cape cod in the high desert of Scottsdale Arizona.
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