Construction Loan & Budget
This is my first of two blog posts about budgeting. Budgeting is about 75% of your overall build and has to be your biggest topic of discussion before anything else can happen. Your overall budget for your whole build should be set before you even buy your property. There are some huge elements of a building budget that often get overlooked when planning. I am going to mention those and share with you our favorite go to tool to calculate your future mortgage.
When it comes to budgeting, the #1 place you should look is www.daveramsey.com He is the best financial advisor I have ever encountered. It is the platform Jordan and I based our budget on since we got married and it has been amazing for us. That is a whole other blog that I will go into later, but for now I will tell you he recommends that your mortgage be no more than 25% of your take home pay. When you have this number, it will tell you how much house/land you can afford. One of the best free, online tools that Dave Ramsey offers is the mortgage calculator. Here you can input your loan amount, your down payment, your interest rate, and your payoff rate. It also has the option to include your taxes and insurance as well as PMI if you don’t have enough for your down payment. After you input all of the information, it will give you what your monthly payment.
Now let’s get into what is going to go into your loan amount to help you get an even more accurate idea of what your monthly payment is going to be.
Land: Click HERE to read my post all about how to buy the best land. If you have not bought the land yet, when considering the cost of the land, don’t forget to take into account there will be additional fees at closing. Also, like my previously written blog post says, and touched on down below, consider everything that may need to be prepped to get the land ready to build.
Site Prep work: You are able to pay cash for these, and/or fix them into your loan, it is up to you. We decided to roll them into our loan so we would have more cash at the end of the build for home décor, landscaping, etc. Here are the things you’ll need for your land before the house even gets started.
Water — You’ll need to have a well dug or have existing well inspected. Or you’ll need to pay to get connected to city water.
Electrical — You will have to connect to local power. Get a quote from power company to do this, but also get a quote from your builder if he can save you money on trenching etc.
Septic/Sewer — Hopefully you have selected land that perks well. You will need to have a septic designer give you a quote and plan for your build. (It does not have to be installed before building, just planned, quoted, and approved by county.) Or connect to city sewer.
Permits — Depending on where you live there can be a permit for just about everything.
On the island, had we gotten far enough to purchase our building permit, we were nearing $10,000 in permit fees overall. Do your research, and talk to the county.
Construction fees: Click HERE to read my blog about how to find a good builder and HERE for house plan advice. If you have already selected plans, it’s a great idea to give them to your builder early so that they are able to go over them as soon as possible. In doing this he is able to get sub quotes. Therefore you will have the most accurate budget to bring to your Construction loan officer.
Overages: On average, cost of construction is over budget by about 10–20%. It just happens. Keep this in mind for your overall budget and I even add this into my pre-construction mortgage calculator.
Loan officer/closing costs: Don’t forget this important part. You will owe your loan officer for all their efforts in preparing and processing your whole build. This closing cost will be somewhere between 2–4% of the loan amount and commonly gets overlooked.
Now that we have the breakdown of everything, lets put it into a mortgage calculator. I am going to use fictitious numbers for learning purposes. Say you buy the land for $100,000. All of the prep work on your property will cost you $50,000. Your builder has quoted you $300,000 in construction costs. We add 15% or $45,000 in overages. Thus far we have $495,000. Now add 3% or $15,000 (I rounded up) for closing which gives us $510,000.
Line 1 — On the website, that $510,000 is your loan amount.
Line 2 — Ideally you would give a down payment of 20% or $102,000
Line 3 — Type of mortgage. 30 year or 15 year. (I selected 30 year)
Line 4 — Interest rate. As of 3/17/2021 The national average is 3.34% for 30 year & 2.64% for 15 year.
It automatically includes insurance and taxes and give you a mortgage of $2,334/month. Is this number more than 25% of your take home pay? If not, congratulations! If so, it’s time to reassess your build and scale back so that when you are finally home, you can live comfortably and stress free in your affordable home.
As you can see this is a really great tool to help you see that things add up really quickly and it also helps you get a better understanding of how much land you can buy and/or how much house you can afford to build. I hope you find this helpful.
