How To Build House and Home                                  

An Information and Instructional Guide
                       
Chapter 3 - Financial Considerations

How much house can you afford? How much cash do you need to build a house? How do you figure it out? Who has the answers? Where do I get help? Where do I go for mortgage money?

Do you start at the beginning and work forward to figure it out or do you start at the end back in to the number? Well, both.

• If money is no object just design the house you want and then price it out.

After you pick yourself back up off the floor lets try the other direction.

• How much do you have in savings to put towards the cost?
• How much equity do you have in your current home?
• How large a mortgage can you afford?

This may a good time to have a chat with a mortgage loan company to see what you may be able to qualify.  Normandy can pre-qualify you.

Estimate of Mortgage Paymets and Affordability

Start with some general guidelines.

• An average house will cost between $75 and $125 per square foot to build (w/o the lot). 
• Larger upscale homes be in the $125-$175 range per square foot to build (w/o the lot).  
• High-end home could run in the $175-$300 range per square foot to build (w/o the lot).  

If we use an average range of $110-$150 we can get a reasonable estimate.

• 1,500 sq ft house at $110 per/sq ft equals $165,000; at $150 per/sq ft equals $225,000
• 2,000 sq ft house at $110 per/sq ft equals $220,000; at $150 per/sq ft equals $300,000
• 2,500 sq ft house at $110 per/sq ft equals $275,000; at $150 per/sq ft equals $375,000 

You get the picture. Lets say your total cost is $225,000. Can you afford this? How much do you have to put down? What will your mortgage payments be? You can use the payment calculator to figure out your monthly payment.

Let’s run through an example.

• Say you can out down $45,000. That is 20% and will allow you to skip PMI. (PMI is Private Mortgage Insurance, it is an extra cost you pay to protect the lender when your equity is less than 20%, otherwise stated as when your Loan to Value “LTV” is over 80%). This is insurance for the lenders protection only; it does not cover the borrower.
• A mortgage loan of $180,000 at 6.0% for 30 years gives you a payment of $1,369.19.
• Not too bad, but wait. We need to figure in the taxes & insurance. Total real estate taxes are $3,000* per year and house insurance will cost $480.year.
• Now our monthly payment is $1,079.19 + $250 +$40 = $1,369.19

*Annual real estate taxes can vary greatly from state to state You may want to consult a real estate professional to get a good estimate of your taxes.

What if we only put down $25,000 (11.11%) does the PMI kick in? Yes it does.

• A mortgage loan of $200,000 at 6.0% for 30 years gives you a payment of $1,199.10.

• The PMI impact our new monthly payment is $1,199.10+ $250 +$40 +86.67 = $1,575.77

Do you think you can afford this payment? Does your lender? Your lender has certain ratios that they use to make this decision. These Debt-to-Income ratios have two basic calculations.

• The “front end” is the ratio of your proposed mortgage payment (principal, interest, taxes & insurance or PITI) to your monthly gross income. The norm is 28%, but some lenders will stretch to 30+%.
• The “back end” is the ratio of your total monthly debt payments to your monthly gross income. The norm is 36%, although some lenders may go to 41+%.

Let’s look at examples based on the payments we calculated above:

Building Costs

We started down the mortgage path to try to establish how much of a house you could afford. To get a good number we recommend you get pre-qualified from a reputable mortgage lender. Normandy will be glad to pre-qualify you. We will tackle the whole financing process later in Chapter 9. Now we will get back to the cost of your new home. The breakdown of the total cost is up to you (and your contactor & suppliers).

• You can breakdown the total cost by specific categories and items.
• You should check multiple sources for best deals. Different material choices can significantly impact the total cost. Plan versus fancy, custom versus standard, larger versus smaller, included or excluded – so many decisions.
• Our cost estimate Worksheet will help you budget your funds.
• You need to see the big picture as well as the cost details; you will need to the balance the home. You don’t want to spend all your money in one area and then fall short in others. A stylish exterior with a Spartan-like interior may not make you happy. Likewise a luxurious interior covered in a plain exterior may be just as frustrating, especially in the long run.. 
• Spend more on things most important to you and less on those that don’t mean as much.

Keep an eye on your budget and work to hold costs to that number. It is easy to exceed budgets when building.

• An extra couple of dollars here and there may not seem like a much, but with so many different areas in play it can add up very quickly.
• Invariably, there will be some cost overruns. How will you pay for these? Did you build in a contingency figure (5%-10% of building costs is a reasonable number)? Did you keep some cash aside? Can you borrow money from a family member?
• Proper financial budgeting will make things run smoother. Set your limits and stick to them.
• If you really need to make a change that will cost you more money see what you may be able reduce in exchange. Which features are important to you and which ones can be scaled down or eliminated?
• Negotiate with the builder share the costs

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