Want to Build Your Dream Home? Some Things to Know First
My wife and I spent a few vacations looking at various vacant properties, dreaming of building a special home with everything just the way we wanted it to be. We never got as far as purchasing either the land or hiring an architect, but we were very close a couple of times. Here in Mt. Pleasant, South Carolina, we nearly purchased a small home in a great location, planning to renovate it and add a new wing. I hate to say it, but we would have stumbled in blind.
It wasn’t until I became a realtor that I even understood the concept of a construction loan, much less the details of how they work. And there’s much more to the process than just the loan – it turns out there are many things to keep in mind when planning to build your own home before you make the plunge. Read on and Learn!
To be clear, I’m not talking about buying new construction from a builder who has purchased lots in a community and has specific floor plans and upgrades to choose from. In this case, the builder himself has taken on the construction costs prior to selling you the house/lot combo, and you simply obtain financing the traditional way – through a home mortgage. (Please see my blog that discusses why you should always use a licensed agent to help you through that process.)
This article discusses the more hands-on approach, where you purchase land, hire an architect, and either become a general contractor yourself or hire one to manage the construction for you. You can also purchase a custom home from an established builder, but you will have less flexibility in the final product. Whichever way you choose, you will need a construction loan unless you plan to pay cash (in which case, please adopt me – I’m an orphan).
Hire a great Agent!
A good real estate agent is your best friend and ally during a big project like this. Your agent can help you select the general area, choose a property to buy, and leverage their local network of contacts to suggest architects, builders, and a variety of licensed contractors. They can also guide you through the many phases of obtaining a construction loan and mortgage, navigating local ordinances, and all the other essentials that you don’t know about or want to handle.
Buying a vacant piece of property is different from buying a home. The value of land is calculated partly based on the “highest and best use” of the land. For example, if the property is zoned commercial, it’s likely to have a much higher value than residential, even if you plan to build a home on it.
You also need to consider utilities. If they aren’t already there, you will need to pay for water, sewer, and electric service to be brought to the land. Also, don’t forget about cable TV and landline internet if they’re available in that area, although fiber Internet isn’t as critical in today’s world of 4G/LTE cellular data access. If you’re unable to get city water and sewer, you will need to have a well dug and a septic system built. Most communities require a minimum square footage in order to install a septic system (in this area the minimum is 30,000 square feet, just under ¾ of an acre).
Many mortgage companies won’t lend on vacant land, so be sure to check in your area to see which lenders will. South Carolina Federal Credit Union here in The Lowcountry is one example. If you already own the land, you may be able to use its value as collateral against your construction loan.
Hiring an Architect and Builder
Unless you want a true showpiece that’s designed by a world-famous architect (think beaucoup $$), you will want to find a reputable architect who’s local to you, or to the area you’re building in if relocating. It’s important that the architect understand and clearly articulate back to you what you’re looking for in the home, including the size, your budget, exterior materials, internal finishes, etc. It’s more than just a business partnership; your architect should understand you and your family’s lifestyle on a personal basis to ensure the completed home works for your daily life.
One local architect, Tommy Manuel, provides his clients with a design brief that captures all of your desires and parameters in clear language that you both agree to, well before the building process begins. It may sound simple, but a document like this can save significant money, time, and stress once the project begins. His free guide describes the process in more detail, and you can access it here: Preparing For Your Design Project
Architecture services are definitely not one-size-fits-all. Basic service may include just a permit-ready design where you choose your interior and exterior finishes and materials. From there it can go all the way to a completely custom design that exactly matches your lifelong dream. You can pick your own builder of course, but there are advantages to using a builder the architect has worked with before: the two will have developed a clear communication process that both speeds up the work and results in fewer chances of errors along the way.
Be sure to do your homework before hiring these essential experts. Read reviews, ask for references, and visit homes they’ve designed and built, either completed or during construction.
Construction Loans come in two basic types: those that cover the construction process only, and those that convert into a typical home mortgage once the home is complete, called construction-to-permanent loans.
Construction-to-permanent loans offer the advantage of a single closing, which happens just once and involves a single set of closing costs. During construction, you will pay only the interest on the loan, which varies with the Prime rate. Once construction is complete, your lender will convert the loan to a regular home mortgage (fixed or variable rate, with a term). At that time, you begin paying down the principle. Some lenders let you lock in a mortgage rate at the time you take out the loan, which could be to your benefit if rates rise during construction. These types of loans typically require a larger down payment than construction-only loans, at least 20% of the anticipated final mortgage amount.
Construction-only loans can be advantageous because they often require a smaller down payment. If you’re paying a mortgage on your current home, holding on to your cash might be very appealing. There are other factors to consider, however. You won’t be able to lock in a full mortgage rate until after construction is complete. If rates go down great, but if they go up it could impact the budget you’ve planned on. Also, if your financial circumstances change during construction, you may have difficulty qualifying for your mortgage. It’s usually safer and more cost-effective to obtain a construction-to-permanent loan if you can.
Regardless of the loan type, lenders are more selective and diligent when granting a construction loan; the process can be more involved and take longer. They will look at your ability to cover unexpected costs, and also to make sure you can afford to carry your current mortgage along with the construction loan. Since there is no existing home in place as collateral, the lender will also want details about construction type, materials used, and the contractors/subcontractors you and your builder choose.
For many, building their own custom home is the realization of a lifelong dream. If done correctly, with sufficient knowledge of what’s involved up front, your custom home will be a legacy for generations. And best of all, you can enjoy it yourselves for the rest of your lives.
And remember, don’t forget that extra guest room for me.