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Home Construction Loan
II. Financial Qualifications Before you go very far down the home building path and get your hopes and dreams set on a X#$@! square foot home, you should make sure you can afford it. This should be obvious to everyone, but too often this most basic principal is overlooked. There are a couple of general rules that provide some guidance. These are: v A down payment of at least 10% of the total value of your building project will be required. If your building project (land and house) is projected to be $300,000 you will need a minimum down payment of $30,000. v The total monthly loan amount extended to you will be in the range of 28-35% of your gross monthly income. For example if you earn $5000 per month gross, then the amount you will be allowed to allocate to taxes, principal and interest for a home mortgage will be $1400 -$1750 per month. If one assumes a 7% interest rate and a 30-year mortgage that translate into a total loan amount of $233,000 assuming $1550/month of principal and interest and $200 per month in taxes. However, the best way to determine the amount of money you can borrow - and consequently, the value of the home you can build, is to get a bank or other financial institution to pre-qualify you for a loan amount. You can go to almost any bank to do this, but you might as well do a little additional legwork and select an institution you are likely to work with when the time comes to borrow money. Most people who are building homes will be interested in something called a home construction loan. This is a loan that is specifically tailored for the home building process. In a sense, it works like a credit line. Once you are approved for a specific amount, you write checks against that account as you buy your lot and then as you begin to pay the builder. The payments you make are "interest only" payments during the construction phase based upon the outstanding balance. Initially there are no up-front points or closing costs, though depending upon the lending institution there could be a small application fee. Only at the point that construction is finished and your house has been completed will you go through a conventional closing. At that time you can expect to pay all the normal fees associated with a conventional mortgage including points, title insurance, etc. Once you know how much money you can borrow, you should then be able to determine how much of a house you can afford. Add the amount of equity in your current home (if you own one) to other sources of cash you have set aside and budgeted for the building project to the loan amount for which you have been qualified. This is the total amount of money you have to spend on the building of your new house. You may also want to plan for spending 10% more than the total building budget because, inevitably, you will spend more money than originally budgeted or planned. These cost overruns come in a variety of shapes and sizes and can include any number of things, like the upgrading of the quality of an appliance, cost overruns for the drilling of a well because it was deeper than estimated, the washout of newly seeded grass because of heavy rains, changing your mind about the color of the siding once it has started to go up - you name it, and it has happened. It is also a good idea, at the very beginning, to run a credit report on yourself. You may not think you have bad credit - and you may not - but what about that person who is using your social security number fraudulently, or the bill you never paid to that thief of an auto mechanic. It is well worth your time and money to take a look at your credit history and clear up any problems before you go talk to your friendly banker. There are many places on the Internet you can go to run a credit report.
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