Have you thought about building your own house but are not exactly sure how to get started? You’re not alone. There are a lot of steps that go into constructing a brand new home. Sometimes just figuring out where to start can be the biggest hurdle to overcome.
We’re here to help you make that jump! Purchasing a new-build home is very doable, and there are plenty of resources to help you understand the process. We will walk through how you can begin working on the house of your dreams by developing a budget and understanding the common types of financing options out there.
Plan Your Budget
Before you can choose a neighborhood or area where you’ll build, you’ll need an estimate of how much you can afford and the amount you’re willing to spend to construct your new home.
You can begin your budgeting by figuring out your maximum purchase limit based on your income. The general recommendation for this is to use the 28/36 rule, which suggests that you shouldn’t spend more than 36% of your gross monthly income on all your debts combined.
You’ll also want to take into consideration that construction loans may have more stringent requirements than other loan programs. Often times you’ll need to put down at least 10%, so you’ll want to plan to have that cash on hand to close on your loan.
Getting pre-qualified with your lender is the best way to firm up your budget and get specific requirements for the loan program you choose to finance your new build.
Choose Where You’ll Build
Now that you’ve got a firm grasp on your budget comes a more fun part of the process – choosing where you’ll build your new home! Many home buyers who are building their first new construction love this part because here is where their vision really starts to come to life.
When you select a lot to build on, you should consider:
- The size, shape, and slope of the lot.
- The direction the home will face.
- Characteristics of the neighborhood. Ask yourself if this feels like the place you can confidently call home.
- Any zoning or development plans or restrictions for the surrounding area.
- Location in relation to electrical towers, streetlights, or major roads.
- Property taxes
- Available amenities, such as gas and sewer, high-speed internet service, municipally supplied water, or underground utilities.
- Proximity to work, schools, recreation, friends, and family.
Of course, you’ll also be weighing the costs of certain areas over others. This is why setting your budget early on can help narrow down the selection and help keep you on track for what you’ve planned to spend.
Select A Home Builder
With a budget in hand and an idea of the area where you’ll be building, it’s time to select your home builder. The builder you choose will transform your vision into reality, so you want to be confident in both their skills and your relationship with them.
First, you should put together a list of non-negotiable aspects of the home you’ll be constructing, such as a certain architectural style, features, or amenities you can’t live without. That will help you filter out any builder that can’t accommodate your must-haves or don’t specialize in them.
Even more important is evaluating the builder’s experience and reputation. You want to know what their strengths are and what their clients have to say about their experience. The best resource for researching a home builder’s track record is online reviews, such as Google, Zillow, and Facebook.
You should also ask to see their previous projects and request a lit of prior client references. Having a conversation with another customer from that builder can be your best resource in the selection process.
Negotiate A Contract
Once you’ve found a builder you trust, you’ve got to put pen to paper and finalize all the details. You’ll agree to a written contract with the builder, which will include all the specifications for your new home.
The contract will include exactly what the builder’s responsibilities are, called their scope of work, any subcontracting they may do, how they will charge for their work, and the materials needed for the job.
Much like you would negotiate with the seller if you were purchasing a home that was already built, this is your opportunity to negotiate with your builder and establish terms that are agreeable to both sides. Once signed, both you and your builder will be held to the terms of the contract. And if there are any changes that need to be made after the initial contract, be sure to get those in writing.
Secure Financing for Your New Home
Before you break ground on this new home journey, you’ll need to finalize how you’re paying for your new house. If you got pre-qualified with your lender early on, this process will be a breeze because you’ll have already done much of the work for your loan.
Your loan officer will walk you through choosing the best construction loan program for your goals and financial situation. Lenders that specialize in construction financing offer a variety of solutions to fit any new build.
Some common construction loans are:
- One-Time Close Construction Loans. With this option, you only go through one approval and closing process, so you only pay one set of closing costs. It’s an Adjustable Rate Mortgage (ARM), with interest-only payments during the construction phase of the loan, which is for the first 12 months. There are paid extension options up to 18 months. Once construction is complete, the loan automatically converts into a fully amortizing mortgage with periods of a stable interest rate and a variable interest rate.
- Two-Time Close Construction Loans. This option splits up the construction loan process into two parts: an initial, short-term construction loan, followed by a typical mortgage. Once construction is complete, the initial loan is refinanced into a mortgage – also referred to as permanent financing. Because there are two separate loans, there are two separate approval processes and closing periods. You’ll have access to the full selection of loan types available at the time of conversion to permanent financing.
Whatever option ends up being the best for you, your loan officer will prepare you for what to expect and what you’ll need to bring to closing so that you can have a smooth start to your new construction.
There’s a lot of work that goes into building your new home from the ground up. With everything that you’ll be working on, you’ll want peace of mind knowing that you’re working with a construction lending expert. Our team of loan officers are some of the most experienced in the industry when it comes to construction loan programs. Get started with a free consultation today.
The included content is intended for informational purposes only and should not be relied upon as professional advice. Additional terms and conditions apply. Not all applicants will qualify. Consult with a finance professional for tax advice or a mortgage professional to address your mortgage questions or concerns. This is an advertisement. Prepared 06/02/2022.