Like many newbie builders, I spent time and money buying land and home plans when I first started building, only to realize later—and often, regrettably, in the middle of construction—that I had made a catastrophic error. Either I had chosen the incorrect site, had to pay expenses I had not anticipated, or could not afford to build the house using the blueprints I had bought.
I’ve learned to do “preliminary planning” to minimize the money and time I would lose upfront. In this lesson, you’ll learn how to answer the most crucial question to get things started, “What size home can you afford to build?” Once you know this, you can begin purchasing the “right lot” and “right set of house plans.”
A. How Big of a House Should You Build?
Determine the house size you can afford to build before investing in a lot or a set of house designs.
1. What Are Your Means?
It would be best if you first decided how much you can borrow, how much you can (or want to) pay each month, what to include in your loan, and how much it will cost to build a home per square foot in your neighborhood to establish the size home you can afford to make.
a. loan pre-qualification
You must obtain this number by contacting a local or online mortgage broker. Ask your present banker for a recommendation on a permanent loan provider if you are unfamiliar with any mortgage brokers in your neighborhood. Your bank probably has a mortgage division and will desire your patronage.
Give the mortgage broker the required information to determine the precise amount you can pre-qualify for. You shouldn’t have to pay the lender anything to be pre-qualified for a loan.
Find out what is causing the issue if your salary, credit history, or recent job change prevents you from qualifying for a loan. Many problems can be fixed in six to twelve months. Go to a different mortgage broker if you are denied. Due to the variety of loans offered today, a consumer who one lender has rejected might be accepted by a different one. Find a mortgage broker specializing in handling credit concerns if you have them. I’ve seen that mortgage brokers that exclusively deal with the (easy) good credit consumers would not know how to work with someone who has had troubles.
2. What Monthly Amount Are You Able Or Want To Pay?
You must decide how much you can afford to pay each month before determining how much you qualify for. Once settled on this sum, you must select how much this monthly payment will go toward hazard insurance and real estate taxes. You can pay for principal and interest from the remaining balance.
3. What Must Be Presented With the Loan
You should prepare ahead of time to ensure that your loan amount will cover all necessary costs, including lender fees and material, labor, overhead, and subcontractor charges.
a. Loan fees
Typical lender costs are as follows:
– Construction loan closing charges are typically 2% of the loan amount.
– The construction loan’s interest rate is typically prime plus 2%.
– Permanent loan closing expenses are typically 4% of the loan amount.
b. The Estimated Cost of Construction (Material, Labor, Subcontractors, and Overhead)
You have not yet made any purchases with money. You might now need to make a little purchase. I advise you to get a current R.S. Residential Cost Data edition from Mean. This manual is available for sale online, and your local public library may also have a copy. The first chapter contains the majority of the information you want.
Provide accurate information about the type and caliber of the house you wish to construct. The means will describe how to assess the quality. Then add any improvements to the base house, such as a deck, a bathroom, and a driveway. Use your area’s “location factor” after that. You will be astonished at how closely this predicted cost to build your home would be to the actual price [a home will cost more to build in San Francisco, California, than in Atlanta, Georgia].
Many builders have said, “There is no way the home I’m building will cost this much,” only to be startled when they discover the actual cost once the project is complete.
To determine whether the builder was charging too much or drastically underestimating the cost of the home, I would want to know this number if I were looking for a builder. More issues arise from minimizing the expense than from overestimating the cost.
4. How Much Space Can You Afford?
For illustration’s sake, let’s say you can borrow $194,504.00. After subtracting lender fees of $16,046.00 and cost additions of $41,378.00, you’ll have $137,080.00. This amount can then determine the total square footage you can build. You can construct a 2,038-square-foot home based on a price of $67.24 per square foot.
Loan amount: $194,504.00.
Fees to Lender = -16,046.00
Subtractions equal – 41,378.00.
2,038 square feet equal $137,080.00 / $67.24
Consider this: You could have financed anything you desired. You could have offered a trip to Europe, a washer, dryer, or dining room furnishings. Your choice. But any additional features will ultimately reduce the house size you wish to construct.
WARNING: You won’t believe how many people, even builders, will use this straightforward math to buy a 2,000-square-foot house plan, borrow $194,504.00, and begin construction!
When you get the plans, it’d still be wise to wait to start construction before figuring out how much it would cost. Our calculations are merely educated guesses.
I advise you to “find a lot” as your next step because building a home for a specific lot is simpler than discovering a lot that will accommodate a particular set of house designs.
The National Institute of Home Building is located in Atlanta, Georgia, and was founded by Tom Harrison. Tom is a native of Atlanta and a Georgia Tech alumnus [http://www.nihb.com]. About 30% of Tom’s students became professional home builders. Tom has taught more than 8,000 people how to construct homes without doing physical labor.
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