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6 Easy Steps to building your own home |
Home: 6 Steps: STEP 1 - Arranging Financing
It is important that you are aware of all the costs and options available. This is key to arranging the appropriate financing to build you new home.
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- Homebuilders will prepare a cost breakdown of the project that has four cost components:
- Fixed Costs: basically the startup costs such as the land purchase, building fees, architectural fees and the like.
- Bids: portions of your home costs that are from subcontractors and suppliers for plumbing, roofing, foundation, etc. These players will provide estimated cost bids based upon the projected plans and specifications.
- Estimates: this includes the builder's estimates for materials and services to build your home. Such items include lumber, concrete, site excavation, trash removal, etc.
- Allowances: includes the finishing touches of the home such as cabinetry, flooring, lighting, landscaping, etc. The builder will estimate a dollar figure for these items. Anything in excess — or desired upgrades — is the financial responsibility of the buyer.
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1) Lenders require a cost breakdown to approve the amount of construction financing. A good estimate will be within 1-2% of the actual costs. A poor estimate can be off as much as 5-10%.
2) Homebuilders generally tack on a fee as a percentage of the total cost or some fixed amount. You will need to negotiate with the builder on fixed price guarantees and warranty provisions.
3) Keep within cost estimates:
- It will be tempting to upgrade on features or alter the plans that will increase the cost estimates. It is a good idea to have a plan ready when cost estimates exceed their budgeted amount. This way you can act fast so as not to delay the construction.
- Suggested plans may include:
- Cash Reserve: maintain a separate cash reserve or take out a home equity line on your existing home
- Financing Plan: some lenders may allow a percentage increase of the line for extra costs. But there is a limit to this percentage. Lenders expect the construction plan to remain within costs.
- Change Building Plan: you may need to redesign your building plan to bring the project down to a more modest design and funding.
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