One of the biggest struggles we had after we decided we wanted to build was “where do we start?!” It was so easy to decide that we wanted to build a home, but after that… we were a little lost!
Here is my disclaimer: I am NO expert by any means, and I am just sharing our personal experience. I’m sure every builder, every bank, every client has different experiences… I just want to share ours so that maybe it gives you a little insight into the whole process!
First up, we had to find a lot that we wanted and find a contractor. Sometimes these go hand in hand… it seems like lately a lot of developers that own subdivisions also act as contractors and you have to use them to build your house. I don’t have any experience in this because we found a lot in a subdivision that allowed you to use any contractor. I will say that if your subdivision requires that you use their contractor, make sure you like the “style” and feel of that neighborhood. You can often get kind of stuck into pre-picked options that fit into their style, so make sure you really like the look of their current projects. We were fortunate in that we knew our builder through good friends and watched him build two houses for our friends, so we knew and trusted his work! Even though we were already sold on his work, we spent a lot of time with him listening to the details of products that he was going to put in the “guts” of our house (and why) and we spent time looking at tons and tons of houses that he had built or was in the process of building.
We purchased our lot first through just a standard loan that we knew we would roll into our construction loan later once we had plans, a cost to build estimate, and an appraisal later on! Once we had the lot, we began working with someone to design our plans and then with our builder to determine the estimated cost to build (more on this process next time!)
Once all of that was in place, we began the construction loan process. I’m going to use some really simple numbers just to make it easy… I learned a lot during this whole process, so I hope this is helpful! Once you have the land (say it cost $10,000) then you get the cost to build the house (let’s just say $90,000) so your total cost for land and house is $100,000. The bank then does an appraisal… they do this based on your plans and comps in the neighborhood. So say your $100,000 house is in a great neighborhood with his resale value and your appraisal comes back at $110,000! On a construction loan, banks will typically loan you up to 85% of the appraised value of the finished home (land + house) so they would give you $93,500. But it’s going to cost you $100,000 to pay for this house and land. You are responsible for the remaining 15% (or $6,500 in this case.) I sort of think of it like a down payment, but it’s a little backwards because you might end up paying it to the builder at the end once your construction loan runs out. You have to prove to the bank that you have this remaining 15% readily available to cover the cost to complete your home!
That’s basically it as far as our construction loan goes! It’s been a fairly painless process, just a lot of learning! Once construction is complete, we will convert our construction loan into a standard mortgage and from that point, it isn’t any different than buying a previously-owned home.
I hope that is somewhat helpful. When we were starting this whole process, we heavily relied on advice from friends and asking a million questions to our bank! It’s a little scary taking the plunge into building a home, but I know it will be so worth it!
Next, I’ll share the process of figuring out how much house you can afford and how to pick plans that fit within your budget!
For you guys that have built before, I’d love to know if your experience was similar or different!
Thanks for reading!