Many of us dream of building a dream home.
What could be better? You get to plan the home and build it the way you want. You can finally get all the things you want.
Before you get started, though, it’s important to understand that building your dream home is no small feat. There’s a lot that goes into it. Here are seven things you need to know:
- You’ll Pay for a House Plan
No matter how you design your dream home, you will need a house plan. You can’t just start building. There are websites that allow you to start with a basic plan and then customize. However, if you want the plan blueprints, you usually need to pay a fee.
You can also have the home designed from scratch, but you will need to pay an architect for that. Usually, hiring a home designer or architect costs much more than using a base plan to begin.
- Building Your Dream Home Can Be More Expensive Than Buying
As much as many of us like the idea of building a dream home, the reality is that it can be expensive. You have to pay for the land as well as the cost of building the home.
Plus, there are often additional costs when you customize your home. Depending on how unique some of your features are, things could get pretty pricey. In the end, all the costs could add up, and you could pay more for building a home than buying something already built.
- You Need a Construction Loan
In most cases, a conventional mortgage isn’t going to work. Many lenders aren’t willing to provide you with traditional home loan financing if you are building the house. New construction is considered riskier.
So, instead of getting a “regular” home mortgage, you need to apply for a construction loan.
- Construction Loans Require More Documentation
When you apply for a construction loan to build your dream house, you need to understand that it will require more documentation. When you get a conventional mortgage, most of the time you just need to prove your income is stable and you have good credit.
With a construction loan, however, you need extra documentation. The lender will want to see your budget items and house plan. Additionally, you need to offer a timetable for completion. Basically, the lender needs to know that the project is realistic and that it will be completed — and they will be paid back.
- The 20% Down Payment is Non-Negotiable
When you buy an existing home, you can often get away with a down payment of much less than the “traditional” 20% down. In fact, some lenders are even bringing back the 0% down payment.
It’s a different story when you are getting a construction loan, though. The higher perceived risk that comes with building a home means that the lender wants you to have more skin in the game. Chances are that you will have no choice but to put at least 20% down. In many cases, you might even be required to put 25% down before you can get approved for your construction loan.
- You Need to Decide Who’s Building Your Dream Home
Don’t forget to figure out who’s building the home. You can hire a builder to take care of it. There are many builders who will help you build a home from pre-set plans. You might have the chance to alter the plan to fit your needs. You will get to choose colors and materials for most of the home, however.
If you want to design your home from scratch, you can take the plans to a contractor. The contractor can help you figure out how much everything will cost, and arrange for the workers. It’s also possible to act as your own general contractor while you build your own home. You need to know the laws of your state and locality before you take that step, however.
- You Need a New Loan When Your Home is Built
The construction loan isn’t the end of your financing journey when you build your dream home. It’s a loan meant to cover the cost of building your home. Most lenders make it as a relatively short-term loan. You’re expected to pay it off in one or two years.
When the construction is done, you can refinance the loan as a mortgage. Now that you have a home, it’s an asset that can be used to secure the mortgage. Use the new loan to pay off the construction loan and make payments as you would on any other home loan.
Building your dream home can be a great experience that allows you to enjoy your living arrangements. However, you need to be aware of everything that goes into it before you get started.
Our advise is based on experience in the mortgage industry and we are dedicated to helping you achieve your goal of owning a home. We may receive compensation from partner banks when you view mortgage rates listed on our website.