If you’re in the market for a new home, you may find yourself disappointed by the offerings available locally. There’s not much on the market, or the houses available are in poor repair, or you’re looking for something specific. Building a home can be a solution. Instead of looking high and low for the house you want, you can buy land and have professionals build the house of your dreams. With the help of a construction loan, this can be in reach for a middle-class buyer. However, it’s important not to overlook the additional challenges in building your own home.
The Process
Building a house is a more complex process than buying one. It takes longer, and of course you will need somewhere to stay in the meantime. From start to finish, building a home typically takes six months to a year and may take even longer.
The first step is finding and purchasing land. The price of this varies depending on where you want to live. Preparing the land may require clearing, grading, soil testing, and connecting to utilities. You’ll want to consult an expert before buying land to make sure the land is suitable for the kind of home you want to build.
Next, you will need to find a builder to do the actual work. That builder might in turn subcontract much of the work, hiring an architect, electrician, plumber, roofers, and so on. The cost will vary dramatically depending on the size and materials you want. You’ll want to sit down with your builder to work out the details of what you want and your budget. An experienced builder will have a good sense of how long the build will take and what it will cost. However, delays and unexpected costs do happen all the time.
If you don’t have the time to wait or don’t care as much about customization, you might choose a manufactured or modular home. These houses are delivered and placed on a foundation in a fraction of the time.
Construction Loans
Most people looking to build a home need a construction loan. This type of loan tends to have a higher interest rate than a mortgage, and you will likely need to put 20% down. The loan term is short, often about a year, and during that term you will only pay interest. After the build is completed, you will either pay the loan off or convert it to a regular mortgage.
To get approved for a construction loan, you will need to convince the bank you’re a good risk to take. What if your plan hasn’t accounted for the sandy soil, your builder isn’t experienced, or your blueprints have a serious error? The bank could lose its entire investment if the house doesn’t end up being built. For this reason, the bank will expect to see detailed plans and check the qualifications of your builder. If you expect to be the builder yourself, they’ll want proof you’re experienced enough to pull it off.
You will almost always pay more when you build rather than buy a pre-existing home. First, building a house costs on average about 8% more than buying, including the cost of the land. Second, the construction loan adds that additional interest cost. For many buyers, the down payment is the hardest part to scrape together. That’s especially true if you won’t be able to sell your current home until the new house has been built.
Pros and Cons
Benefits of Building a Home
The obvious advantage of building a home is getting exactly what you want. Need a bedroom for each child and a mother-in-law suite? Hate open plan houses? Got a very specific dream? If you’ve been looking at real estate in your area, you may already know the thing you want is impossible to find locally. Building will be your only option if you don’t want to compromise on your custom plan.
Another advantage is getting to have the location you want. If you hope to move to a rural area, you may learn there aren’t enough houses, but there’s plenty of land. That can make home building a tempting option.
Finally, you will end up with a brand new home. That means up-to-date appliances and fixtures. Maintenance costs will be lower than in an older home if it’s built well.
Disadvantages to Building a Home
The most obvious reason not to build a home is cost. You will have to pay for both the land and the cost of building, which almost always ends up more expensive than buying. Costs can range from $100-$500 per square foot. And while you may want to stick to the lower figure, how much can you compromise before it’s not your dream house anymore? You probably want multiple bathrooms, high-quality HVAC, and an attractive exterior. It’s hard to keep costs down when you have almost infinite appealing options.
Next, there’s the time factor. You will have to live in your current home for many months while the new house is going up. If the weather is bad or you have trouble booking the right subcontractors, that timeline may get longer. That means your current living situation has to be at least slightly flexible.
Last of all, there’s stress. You’ll be on the hook for managing a number of processes that need to happen, from the construction loan to finding all the necessary professionals. Meanwhile you and your spouse might not agree on every detail of the new home. Buying a house means choosing from a limited array of options—everyone knows it’s a tradeoff. But when you’re building, you now have to come to an agreement about every single light switch. If things go wrong, you’ll need to be able to roll with the new timeline and cost. The year you spend building your home may be one of the more stressful ones of your life.
Are Your Finances Ready for a New Home?
Building a new home requires a secure financial foundation. You will need good credit and significant cash down. Don’t get sucked into a major project like this if your finances are already unstable. Instead, talk to your financial advisor about what you can afford and what you need to do to prepare. If you don’t yet have an advisor you trust, we can introduce you to the right person for you when you contact us.
