Are you looking into homebuilding? Read below for the most important financial tips for building a house.
The road to get here was a long one. I can hardly believe that we’ve been living in Simply Every Home for six months! From contract signing to moving in last summer was a long, nearly two year process. Preceding that milestone was another two years of research, back and forth decisions, and financial planning that paved the way to where we are today.
For those of you who have followed our home building journey, or those of you here as you navigate the waters of the home building process, please read below for
The Most Important Financial Tips for Building a House
Maintain High Credit Scores
While this isn’t the only factor in securing a construction loan or mortgage, it is a very important part of the financial planning process for home building. If you’re working on your credit score, then I highly recommend working on improving first and maintaining it for a few years before taking the plunge into the home building arena.
If you do have good credit, maintaining it before, during, and after the home building process is crucial to ensure that you’re financially comfortable for home ownership.
Consider your Financing Options
Construction Loans vs Back-end Financing
The common form of financing the home building process is to take out a construction loan. I don’t know all the details of this type of loan, but on a high-level, it is one lump sum that you borrow from the bank. As you go through the phases of building, you draw against the money to pay for the lot, materials, suppliers, vendors, and contractors. You also start paying back on the bank loan, as you draw money for your home building needs.
For us, because we had a mortgage on our first house, we wanted to avoid taking out a construction loan. We didn’t want to nor could we carry two major monthly payments.
Thankfully for us, our builder offered a back-end financing/mortgage plan. This financing option allowed us to put down a small deposit to secure our lot, pay-as-you go payments for surplus charges to the original contract, and secure a mortgage upon house completion.
Prepare a Substantial Down Payment
The small deposit we paid went toward the down payment of our new mortgage. However, we have been saving (for a long time) to increase what we used for down payment at closing.
While the % of down payment varies on a few different factors, it never hurts to have a big down payment. In most cases, people who decide to build their home are looking to settle down for the foreseeable future. In our case, this will be “forever” home. We may downsize after the boys are grown up and out on their own. But, we have over twenty years (at the earliest) that we will live in our new home before we plan on moving elsewhere.
We didn’t really focus on having a huge down payment on our first house because we always knew that at some point we’d outgrow it and move when we decided to grow our family.
But, having a big down payment secured us a smaller mortgage and paying out less in interest over the life of our mortgage as well.
Build an Ample Savings
When building a house, you need a savings account for your savings account. All jokes aside, take your researched and calculated savings goal and double it. Triple it, if you can. During the home building process, there are many things that can come up as additional costs.
From finish upgrades, to customization, to appliances, things are ever changing during the home building process. And this is sage advice coming from someone who over plans her plans. We built in a ton of upgrades and customizations into our original contract that are part of our mortgage.
But, as we met with different suppliers and contractors, at different phases, there were unforeseen modifications that we wanted to add or we needed to have that just didn’t come up at original contract signing.
In most cases, and in our specific case, the additions we made during the building phase, are all out of pocket costs that we paid in advance of the closing date. If we didn’t prepare with the ample savings, we most likely would have taken out a personal loan to pay off surplus cost balances with a few of our suppliers.
Thankfully, I’m grateful that we had the savings to pay these overhead invoices. And that our mortgage is still what we planned for at the start of this home building process.
Watch Changing Interest Rates
If you are in our situation of having to sell a current house, as well as, secure a mortgage for the new-build home, then keeping a close eye on interest rates is crucial to the final phase of the home building process.
From making sure that you’re getting the best/lowest rate possible to ensuring that all of your financials are in line for closing time, the changing interest rates can definitely be the most important factor for your financial plans following the completion of your home.