How To Budget For Your New Home
The three words for commercial real estate might be “location, location, location” but for private homes, they’re more like “money,” “budget,” and then “money” again. If we stretched it to five words, those who’ve been following along so far would not be surprised to hear that words four and five are “general contractor.” This article will detail how to budget for your custom built home before you start, some of the hidden costs of doing so and, again, why hiring a general contractor is so important.
Start With How Much You Can Afford, Not What You Want
This is easily the biggest mistake a potential homeowner makes before they take the jump. Well, other than not hiring a general contractor. It’s definitely the first biggest mistake they can make.
Most people, when asked what kind of house they’re going to get, start listing off all their dream features. Huge, open living room, tons of windows, a giant kitchen, granite and marble everywhere, a bathroom for each person, a shower that could fit a small party next to a bathtub that could fit a smaller but no less lively party, an outdoor kitchen, elaborate pool/theme park.
You get the picture.
The problem with going that route is you inevitably come to the startling and very real conclusion that there’s no way you can afford all that, and you have to go back through and cut things out.
It’s better to start with what you can get, how much you’re willing to spend on the total loan, and then work your way up from there.
And, as a rule, it’s almost always best to have shower parties in hotel rooms. Much less cleanup.
So What Can You Afford?
They, as in the Royal, all-knowing They, say you shoot for 28% of your net income for the year as allocated to house-related payments. That’s the take home, after-taxes flavor of net. All that money going to the State and Federal governments isn’t going to do your budget any good, so take that right out of your calculation.
Let’s begin making your budget. If you’re already a homeowner, a lot of this will look familiar. But if you’ve been renting until this point of your life, all the little extra expenses that go with owning a home can be daunting. You’ll have things like:
- Property Taxes: You’ll want to see what the values are for where you’ll be living, because these can range wildly. You can find your town’s mill rate by doing a simple internet search or, if you’re in Connecticut, check out this link. (It also explains how mill rate is calculated.)
- Homeowners Insurance: Different from renters insurance, mainly in how much more expensive it is. It helps a little that this is often rolled into your mortgage payment, but you can expect about a 600% increase.
- Lawn Care and Snow Removal: If you’ve been renting, this is often the largest and most annoying addition to home owning. There’s grass to cut and edge, bushes to trim, leaves to rake, snow to shovel. And if it’s not done, not only do your neighbors complain, but the city fines you. Welcome to being an adult.
- Maintenance: If your furnace stops working or your roof blows off, you don’t call a landlord when you own a home. Or, I mean, you could call a landlord, but they’re going to tell you they don’t own the property and to deal with it yourself. In order to make sure you can afford maintaining your beautiful home, save 1% of your home’s purchase value each year, making adjustments to your savings as needed.
- Heating/Cooling: This is kind of a surprise increase for a lot of new homeowners. All that extra space doesn’t heat or cool itself for the same expense as your little one-bedroom apartment. And the older the home is, the higher the cost to heat and cool it typically because of poor sealing.
And, again, if you’re already a homeowner, none of those things are new to you. But expenses will change and your budget does need to include those changes.
Next, list out all your regular expenses. Insurance, car payment, groceries, entertainment, clothing, alcohol addiction, savings. Any current debt, honestly, should be taken care of before you deal with getting a new home. A bank is far more likely to lend you money if you’re not also carrying additional debt. But list whatever debt payments in with your expenses.
List every tiny thing you can think of. Seriously, you don’t want to get into your new home and then realize you left a handful of small expenses off your list, they all add up to several hundred dollars a month and you suddenly have to find ways to cut back to compensate. So if you regularly save for your kids’ college, or the distance of your commute is going to change dramatically in your new location, or your medical insurance doesn’t pay for everything (does anyone’s anymore?) and you go in for this and that over the course of a year, or even something like having dinner parties every month or so. All of that adds up.
So after you get all that written down and after you’ve recovered from realizing that our lives are just a revolving door of the same boring payments week after week after week, subtract the expenses from your net income and you’ll come to what you can pay monthly for a loan.
Where Did All My Loan Money Go? / HIRE A GENERAL CONTRACTOR!
If that number you’re looking at is much less than $1500/month, having a home built is probably not in the cards for you at this point in your life. The National average to build a home, as of 2019, sits at $248,000. It does go as low as $150,000 and as high as $400,000, so if you’re close, you don’t necessarily have to give up all hope. But you generally want to see yourself at or above $1500/month.
So let’s say you managed to get yourself a $400,000 loan. Woo hoo! That means you’re building a $400,000 house, right?
You know how they say the road to Hell is paved with good intentions? Well, the road to home ownership is paved with fees. There are a lot of things that go into having a home built that are going to cost you. Things that don’t factor into the structure of your house at all.
First off, you don’t get a mortgage to have a house built, you get a loan, and those come with their own rules and fees. And then you have to consider these:
- Cost of Blueprints: Having them done by a designer will cost a fraction of the price of having an architect draw them up, but they’re still a sizeable expense.
- Those Aforementioned Loan Fees
- Surveyor: Makes sure your land is platted (mapped) correctly
- Geotechnical Engineer: Makes sure the ground is up to supporting your house. Kind of important.
- Energy Expert: Plan on going green at all? You’re going to need these guys.
- Demolition/Cleanup: Is there a pre-existing structure on your lot that needs to be torn down?
- General Contractor: He’s going to cost you 10% or more of the total cost to build your house, but he more than makes up for it by taking care of literally every single detail and saving you potentially thousands over handling the job yourself.
If you don’t have a general contractor, not only are you going to have to navigate the complex and expensive landscape of housing construction and deal with all the subcontractors, but you’ll also have to deal with the arguably more obscure and difficult legal things listed above. A general contractor more than pays for themselves.
So where did, like, 25% of your loan go? Well, it went to paying all the people who facilitated the zoning, financing, building and inspecting of your house. And while that might be annoying at first glance, it’s all important. No less so than the walls or roof, though noticeably less important than a pool or jacuzzi.
What If I Can’t Get a Loan?
If you added up all your income and deducted your expenses, thought you could deal with a certain amount in payments, but the bank denied your loan, well, there are a few things you can do.
As I mentioned before, banks want to see the payments on the loan are around 28% of your net monthly income. They can go higher. They can technically go as high as they want, but the Federal Housing Authority says your debt-to-income ratio should be about 29%, 41% if you have no other debt. And while a bank can ignore those ratios, they’re certainly not going to lend you money if they don’t think you can pay it back.
If you find yourself getting denied, look to pay down your debt. Not only will that lighten your expenses by one less payment, but banks will think you look prettier and ask you to go on more dates with them. Dates, in this scenario, being your loan.
Another route you can take is securing more of a down payment. Common practice is to have 10-20% saved for your down payment with more, obviously, being preferred. If you have 10% and you’re being denied, maybe look into saving for a year before taking another try at home ownership.
Or perhaps the loan you’re looking to secure is just outside your means. Maybe you’re being denied a $500,000 loan, but would easily qualify for $400,000. Talk to your loan agent. Banks like to make money, so they’ll lend it out if they feel like you’re at all capable of making the payments.
Planning, saving and being honest with yourself are the best bet when it comes to budgeting for a home. Hiring the right professionals to handle the various aspects of the project is equally important. Get it done right from the beginning and save yourself the hassle and cost of fixing poorly completed jobs.