Know What You Can Afford for Your Custom Home


In this series of blog posts, we're walking through the steps to plan, design, and build a custom home. In the last post, and in other prior posts, we talked about planning and about the different ways to go about hiring the right help to design your home.

Before we go any further, it's time to stop and ask: How do you plan to pay for your custom home? Do you know how much you can afford? 

What we don't want you to do is go crazy designing yourself a beautiful home only to discover you can't afford it. The right thing to do is to design a home to match your budget, so it's important to get your finances in order.

Shop for a lender

You'll want to shop around for the right lender. Call or visit a number of mortgage lenders and mortgage brokers. If you already have a builder, ask for referrals. Be prepared to provide information about your financial situation so the lender can determine how much you can afford and pre-qualify you.

Typically, two different loans are involved when you're building a custom home:

Construction loan

Unless you're paying cash, you'll need to arrange for a construction loan. Not every lender offers construction loans, so you'll probably need to shop around.

A construction loan is a short-term, interest-only loan to the homeowner to build their home. The loan is in your name, not the builder's name. Before a lender approves a  construction loan, they will check the credentials and credits of your builder, too. During construction, funds are paid to the builder in draws that follow the project's construction stages.  

Permanent loan

When construction is complete, your construction loan will typically roll over into a long-term mortgage. Depending on your financial situation, the mortgage lender might offer only 80 percent of project costs or less. The good news is that if you already own the land, that can serve as equity.

Make sure you're in charge of your budget

Everyone on your team needs to understand that building a custom home might be the largest purchase or investment you will ever make. You need to be the one in charge of your project's budget. Of course, you don't know what it will cost, but you should know what you are able and willing to spend. A year ago when we needed to buy a truck for the company, we didn't go out looking at what they would cost. We figured out our needs and wants, set a budget, and secured the financing. When we found the truck that fit our criteria, it was a done deal.

Oh -- and by the way -- for all this to work, you will need to share your budget with the team.

At Solluna, we ask our prospective homeowners to bring us two things: an idea and a budget. The idea we can turn into plans and decisions and choices and a home. But if we don't know the amount you're willing and able to spend, we don't know if you can afford your idea. If you're afraid the builder will spend all of your budget, you're right! It's the builder's job to give you the biggest bang for your buck. Remember you haven't given anything away. You're still in charge of your budget, because you set it and get to make the decisions on how it will be spent.

Til next time, Wayne and Mary