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Financing For Your Custom Home
It all starts with a number
It is very important to have a number in mind before you meet with your architect or custom home builder. When designing your home things can quickly end up costing more than you bargained for. If you already know what your budget is then it is easier to know that you can say yes to certain things, and even more importantly it makes it easier to know when you have to say no to things that would throw the project into financial turmoil. This process is meant to be fun and exciting and not a high stress event that may ruin you financially because the project could not be finnished because the money ran out. An unfinnished house would sell for a huge loss in today's Market. Save yourself all of that stress and heartache by planning the financial side of things in advance. Another reason to plan the financial side of things in advance is so that you do not waste everyone's time during the bidding process. It could take from six to fourty hours to run a full bid on a custom home for the contractor. It wouldn't be fair to them if you made them go through all of that only to find out that you really can not afford the house in the first place.
By knowing how much you you can afford on the whole package it will also help you to budget out everything. It will enable you to narrow down your choice for property, knowing that you have a price range to fall between. Property is one of those areas that can vary widely, so if you do have to cut the cost on the project as a whole, the property would be one area that you can dramatically cut your costs.
Check out lenders
Ask several different lenders to explain the loan products that they offer. Loan programs and qualification requirements change constantly, so it's important to find out what options are available to you. Many home buyers are surprised to discover they can qualify for a larger mortgage than they thought they would be able to obtain. Others are sadly disappointed to learn that their dream home is financially out of reach for them, at least for now.
You should start this process months in advance if you can. Before you begin consulting with different lenders, you should obtain a copy of your credit report and contest any errors in it. Cleaning up your credit report ahead of time will put you in the best possible position to be able to borrow the amount of money that you need. This is especially important with today's current financial crisis and the economy. You will need to be prepared to explain any negative information in writing.
Once you narrow down your selection of which lender you are going to go with you should ask them to pre-qualify you for a mortgage. The lender will ask you some questions about your income, your debts and your credit history, then they will use that information to give you a reasonably reliable estimate of how much loan that you can afford. Pre-qualification usually is free. It doesn't obligate you to obtain a loan from the lender, nor does it obligate the lender to provide a loan for you. Make sure that you are fully up front and open with your lender. If you try to hide anything it probably will not come out during the pre-qualification phase, but when you submit your final paperwork for the official mortgage, it will more than likely be discovered. It is easier to explain things right the first time, than to try to cover up something or do damage control later.
Decide what you can really afford
After the lender gives you an estimate of what the bank thinks that you can afford, you should really sit back for a while and assess what you really think that you can afford. Go over your numbers again and again, to make sure you have captured all of your expenses that you provided in your information to the bank. If you are worried or uncomortable with some of the sacrifices that you will have to make then you should borrow less than that amount. You don't have to borrow the maximum amount just because you qualify for it. This has to be comfortable for you, this has to be doable for you. After all, this payment structure will be there for thirty to fourty years or so, depending on the loan that you choose. You should really take a realistic look at how much you are willing to sacrifice for you to be able to afford your new home. The good thing about doing this as one of the first steps is that if you decide to go with a smaller mortgage there are options for you that you can make in the design phase of the home that could make the project more affordable. For an example of a cost cutting measure you could design a larger home, and not build the full home at this time. You could do a room addition down the road to complete those parts of the home that you decided you could do without for a few years. You would need to discuss this with your architect and/or contractor to ensure that it is done right so that it can truly be done if needed.
The amount of cash that you will need on hand to build your home depends on the type of home your building. If you are buying or building a tract home in a housing community you will not need much money on hand. The amount of cash that you will need to get started should be about the same amount that it would take to purchase an existing resale home. In some circumstances the builder may only require a small deposit. For a custom home, the amount of money that you will need on hand before you obtain your construction loan will be substantially higher. You may need to have approximately $5,000 to $10,000 or more, depending on how much the home will cost for the whole project. It may be possible for you to "reimburse" yourself back with the construction loan once you receive the money from the bank, or for you to consider the amount spent to be added to what your down payment is for the full project. This will make the rollover loan easier to get once the home is fully built.
The process of building a custom home also involves a number of expenses that you have to incur before your project is funded by the bank. Some types of expenses that you may incur might include the down payment to purchase the property, having the plans drawn up, engineering for your plans for your particular building site, various government building fees, loan application fees, and a desposit paid to the contractor for their services or any preliminary fees payable to the builder.
Builders typically require a down payment of about 20 percent of the total cost of the project. Some buyers put down as much as 50 percent of the total if they have a lot of equity in the home they sold to move to this new home, or if they have a large amount in savings. Sometimes the new homeowner may even run into a cituation where their property value on the land they purchased for this project, sometimes months or even years in advance, has gained so much in equity to make the homes value rise dramatically enough to build a substantial amount of equity in the home before the home is even built.
If you will be using the equity in your existing home as the primary source of the down payment on your new home, you will need to be sure to obtain a realistic estimate of your home's value and the amount of time that it will be on the market before it actually sells.
Find the true value of your home
Meet with a few different real estate agents to decide which agent that you will go with when the time comes to sell your existing home. Have your real estate agent run a comparative market analysis for your home. It would be a really good idea to sell your current home before construction even begins if you can do so. This will eliminate the stress that you may have to endure if you are stuck paying two mortgages at the same time because your house doesn't sell. The down side of this though is that you may have to move twice, unless you make a deal to either have a closing date of when your house is built, or if the buyer will allow you to rent your house from them until your house is built. Most new buyers would be ok with either of those options, unless they absolutely have to move in right away. If you are stuck with trying to sell your existing home after your new home is built it can be a very stressful.
As you go through the design process of your custom new home, and even while your house is being built, you will be given many different opportunities to upgrade or change some different features or aspects of your home. It can be very pricey to change certain things, but sometimes these changes may be required, or they may just make a lot of sense to do so. Having a cash reserve built into the loan will enable you to choose to accept the upgrades or changes.
Setting up the budget is one of the most important steps in the home building process. Sticking to that budget as much as possible can help set the stage for a very happy and rewarding home building experience.
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