Budgets - Custom Home Building

Speak to your financial institution and find out what types of loans they offer for custom building and financing new home construction. Find out how much you qualify to borrow before you start the process.
They will determine how much you can afford based on several calculations. There is the Mortgage Payment-to-Income Ratio(MR) Total Debt-to-Income Ratio (DR) and the Loan-to-Value (LTV).
Your lender will use a combination of these formulas to come up with the final figure of what you can handle as your maximum monthly payment.
Be prepared to bring all pertinent documents with you when you meet with your lender. They will want to see credit card debt and payments, letters of employment including stable employment history,salary, investments, and list of assets. Any outstanding lawsuits or claims or a divorce could complicate or delay things.
It is to your advantage to pay down as much debt as possible and obtain a copy of your credit report before approaching your bank. If the credit report contains errors, contact them to have it corrected before you proceed.
There are other expenses that will have to be covered that are not directly related to the building aspect of the custom home but must be included in all calculations. Your lender will provide you with an estimate of these costs. They may vary somewhat from one place to another but may include:
How much you can afford will determine just how large and elaborate your custom home will be. The bank usually allows for a mortgage payment that is 25% of monthly income. This figure should include both principal and interest.
To arrive at that amount divide your yearly income by twelve and then divide by four. Once you know this figure you must consult an amortization table for the interest charges and term of the mortgage to determine the total mortgage amount. Your Bank will do this for you.
Remember, banks usually only fund 80% of this so you must now figure out the value of the house. Divide the mortgage amount by 80% and that is the value of the custom house. Now subtract the the cost of the land, construction loan cost and closing costs. The final figure is what you can spend on the building of your custom home.
- Cancellation fees
- City, County or Regional taxes
- Fees for reports such as credit reports, flood reports etc.
- Loan fees
- Appraisal fees
- Title search and Title Insurance fees
- Notary fees
- Property taxes
- Mortgage Insurance
- Plan appraisal fees

There are different types of loans available for custom home builders construction. Discuss them with your lender to determine which is best for you.

A Construction Loan usually carries a higher rate of interest and has a specific time frame in which the job must be completed. At that time you would move to a permanent loan.

A Convertible loan is a Construction loan that rolls over into a Permanent loan and is then converted to a Mortgage. You save some of the closing costs by having this type of arrangement in place.

Budgets - Custom Home Building

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