When I started building, I, like a lot of beginners, would spend time and money purchasing land and/or house plans only to find out later (sometimes, sadly, in the middle of construction) that I had made a terrible mistake. Either I had purchased the wrong location or I was forced to incur costs that I had not planned on or I couldn’t afford to build the home based on the plans I had purchased.
To minimize the money and time I would lose up front, I’ve learned to do “preliminary planning.” In this lesson, you’ll find out how to answer the most important question to start the ball rolling, “What size home can you afford to build?” Once you know this, you can now begin the process of purchasing the “right lot” and the “right set of house plans.”
A. What Size Home Should You Build
Before you purchase a lot or a set of house plans, you must first determine the size of home you can afford to build.
1. What Can You Afford?
To determine the size home you can afford to build you must determine how much money you can borrow, how much money you can (or want to) pay per month, decide what to include in your loan then determine the cost to build per square foot in your area.
a. Pre-Qualifying for a loan
You need to acquire this number by contacting a mortgage broker in your area or over the Internet. If you do not know a mortgage broker in your area, ask your current banker whom they recommend for a permanent loan. More than likely, your bank will have a mortgage department and they’ll want your business.
Provide the mortgage broker with the necessary information to find out the actual amount you can pre-qualify for. The lender should not charge you any money to pre-qualify you for a loan.
If you have a problem qualifying for a loan because of income, bruises on your credit or because you’ve recently changed jobs, find out what is causing the problem. Many problems can be repaired in 6 to 12 months. If you are turned down, go to another mortgage broker. Because of the variety of loans available on today’s market, another lender may still approve a customer that has been turned down. If you do have some credit issues, find a mortgage broker that specializes in dealing with credit problems. I’ve noticed that mortgage brokers that only deal with the (easy) good credit customers will not know how to work with someone who has had problems.
2. What Amount Can You Or Do You Want To Pay Per Month?
When you determine how much you can qualify for per month, you need to decide the amount you are willing to pay per month. When you’ve decided on this amount, you need to determine how much of this monthly payment will go toward property taxes and hazard insurance. The remaining balance is what you’ll have available to pay toward principal and interest.
3. What Should Be Included In The Loan
You should plan ahead so that your loan amount will cover every necessary expense from lender fees to costs for material, labor, subcontractors and overhead.
a. Lender fees
Lender fees normally include:
· – Closing costs on the construction loan [normally 2% of the loan amount]
· – Interest on the construction loan [normally the Prime Interest Rate + 2%]
· – Closing costs on the permanent loan [normally 4% of the loan amount]
b. The Projected Construction Cost (Material, Labor, Subcontractors and Overhead)
Up to this point you haven’t spent any money. Now you may need to spend a little money. I recommend you obtain a current copy of R.S. Mean’s Residential Cost Data. You can buy this manual online or you may find a copy at your local public library. Most of what you need will be found in the first chapter.
Honestly fill in the data concerning the style and quality of home you want to build. Means will explain how to determine the quality. Then add to the base home any additions, such as a deck an extra bathroom and/or a driveway. Then use the “location factor” for your area. [A home will cost more to build in San Francisco, California than Atlanta, Georgia] You will be amazed at how close this estimated cost to build your home will be to the actual cost.
I’ve heard so many builders say, “There is no way the home I’m building will cost this much”, only to be shocked when they see the actual cost upon completion.
If I were shopping for a builder, I would want to know this figure just to know if the builder was charging too much or grossly underestimating the cost of the home. Under estimating the cost creates more problems than over estimating the cost.
4. What Size Home Can You Afford?
Therefore, for example purposes, let’s assume the following: you are able to borrow $194,504.00 (based on your projected monthly mortgage amount), less lender fees of $16,046.00 and cost additions of $41,378.00, you will actually have $137,080.00 from which to calculate the final square footage that you can build. Based on $67.24 per square foot, you will be able to build a 2,038 square foot home.
Total Loan = $194,504.00
Lender Fees = – 16,046.00
Additions = – 41,378.00
Balance = $137,080.00
Square Feet = 2,038 ($137,080.00/$67.24)
Food for thought: You could have included anything you wanted in the loan. You could have included dining room furniture, a washer and dryer, or a trip to Europe. You decide. But any additional inclusions will ultimately decrease the square footage of the home you want to build.
WARNING: You would not believe the number of individuals, including builders that will go through this simple arithmetic, purchase a 2,000 square foot house plan, borrow $194,504.00 and start building away!!
When you purchase the plans, you’d still better not dare borrow money and start building before first determining what the actual cost is going to be. Our calculations are nothing more than a guesstimate.
Because it’s easier to design a home for a given lot rather than find a lot to fit a given set of house plans, I recommend you next move should be to “find a lot”.