- There is a shortage of existing home inventory.
- Interest rates are low. They are definitely softening the blow of the rising prices.
- P&I is $2694.27/month
- Total payout over 30 years $969,937
- P&I is $2533.43/month
- Total payout over 30 years $912,034.80
- Have realistic expectations. I have found that most people don’t. The days of building a home for $120/sq foot are gone. To be safe, I would budget at least $185-$200/sq feet minimum for your home cost.
- Build in a large “contingency” line item into your overall budget. A contingency percentage is kind of like “just in case” money…just in case you run over budget on something. I would recommend at least a 10% of your overall construction cost contingency built in, even if you are working with a builder who does a fixed price contract. If you don’t use the money, then it will go as a principal reduction on your permanent loan. If you DO need it, you will have access to it. Otherwise, you will be paying cash out of your pocket for the cost difference. This can get pretty expensive if you are not prepared.
- Make sure you are working with the right builder. If the cost seems too good to be true, it probably is. Foolish expectations or just plain not knowing don’t mix well with the reality of building a custom home. Check references. Talk to their current and past clients. Do your homework.
- Have extra money saved ahead of time. I will tell you that there has hardly been one person who hasn’t changed something during the building process. It is just reality.
- Consider building a smaller version of your dream home if the costs are far beyond what you can afford.
What happens if you are already closed on your construction loan and know you will run out of money?
- The bank can go and reassess your existing loan to see if an increase can be tolerated guideline-wise. Obviously, not only will you need to prequalify, but the lender will also need to make sure that you aren’t currently maxed out on your loan to value etc.
- The original lender may also choose to do a second lien for the extra money. Again, if you are already at your max LTV, your lender might order another appraisal to determine whether or not the increase I cost can be covered with the rising home values. Both of these options mentioned so far do take some time and any expenses incurred will be on your dime. It is not guaranteed to work though.
- Pay the additional costs out of your pocket. If you don’t have the cash available, you might inquire about taking money from investments or retirement to cover the difference in cost. (Side note, this is where having a reserve contingency would have sure come in handy).
- Go back and pick less expensive finishes to go into your home. Maybe instead of the wood floors, you pick vinyl flooring (trust me…they have come a LONG way…they are gorgeous now!). There are many things that you can “downgrade” that are just as nice as something that costs 5x as much. You may have to compromise a little more during construction and then replace things after you are living there if you do find yourself actually wanting to. You never know.
- Finally, you could just decide that the price increases are just too much for your budget and it knocks you out of the market so you can no longer build. This really needs to be decided before any building starts. Otherwise, it will be a nightmare. The money used for the construction loan would have to be paid off and you would have to make sure that anyone who did work on the property has been paid. There won’t be any refunds for costs you already incurred. This may result in either you selling your land or refinancing the construction loan into a regular land loan. You could also pay cash to pay off the existing construction loan balance on the land.
Thank you so much for reading today. I hope that I made you smile and think a little bit. Be sure to check out my Podcast on iTunes, Soundcloud and Stitcher —- Jen’s 10 G’s