Before starting your new home search and build, you will need to determine what you can and can’t do financially. It is necessary to take into account as many costs as possible that you can factor in from the beginning. This will help prepare and prevent any large unexpected costs or surprises during the building process. This financial planning is probably the most critical step throughout the process, without this you can’t move forward with building your new home.
Items to keep in mind, are understanding what you can afford for your deposit, loan amount, different development costs, closing fees, and any other expenses that are required. This will help determine what size home you can build and what finishes you can select. If not paying cash for your new home, then you will need a deposit saved for your loan. In addition, you will need some of this money upfront as builders have different requirements for deposits to start construction. These deposits are typically higher than a resale home and can range from 3-20% of the price of the home. The deposit you will give the builder is held in escrow during construction and at the end goes towards your loan downpayment.
A fixed-price contract is typically the best choice when building and is more common with medium to large size builders. If you and your builder don’t have one in place, you must budget for some fluctuations from the original price quoted. Not to forget, any changes to your design or selections you make throughout the build will typically include an extra cost. There is always the potential when building that you could add as little as $250 to possibly $100k to the original price if you select a lot of additional upgrades. This is why it is important to keep this in mind when comparing the prices of different designs and selections from different builders.
If not paying cash for your new home and you’re getting a loan, then meeting with a reputable lender, in the beginning, is the best idea. This way you can receive a pre-approval to know how much you can afford going forward with your home search and build.
If not familiar with what a pre-approval is, it is when the lender verifies a borrower’s information and documentation to determine exactly how much the lender would be willing to lend to that borrower. The documents to get pre-approved are the same documents that you would need to get a mortgage.
Documents like:
- Pay stubs
- Last two years’ W-2s
- Last two federal returns
- Two months’ of bank statements of all types of accounts
- Your credit report