How Much Does It Cost to Build a House?

Factors that dictate cost

While the average costs to build a house can give you a general idea of how much you’ll pay for a new build, it’s important to note that the costs of building any home can vary dramatically. Where you live, for example, can play a huge role in not only the costs of land but the price of the permits and fees you’ll need to cover.

Of course, there are other factors that will dictate how much you pay, from the type of home you select to what you choose to do inside. Other factors that can dictate the costs of your home include:

  • Your lot: The NAHB reports that the average price for a lot of land worked out to $4.20 per square foot in 2015 (the most recent data available), bringing the total for an average size lot (20,129 square feet) to $84,541.80. However, this cost can vary depending on the lot you buy, the size of the lot and the local real estate market where you buy.
  • Home size: The larger the home, the more construction costs you’ll encounter, says Frank Nieuwkoop, sales and marketing director of new-home builder Valecraft Homes Ltd. Larger homes also require more materials (more flooring, more lighting, more fixtures, etc.), he says, which can lead to higher costs in a hurry.
  • Upgrades: If you opt for fancy upgrades, you’ll pay more for a new home, says Nieuwkoop. Granite or marble, upgraded fixtures, and custom woodwork can make any home considerably more expensive. This is one area where you can also save on the costs of building, however. Where laminate countertops may cost just $10 per square foot installed, you’ll pay more like $60 to $120 per square foot for concrete or recycled glass, according to Consumer Reports. If you multiply those savings across all the rooms that need counters in your home (kitchen and baths), it’s easy to see how you could pay more or less depending on what you choose.
  • Home design: The design of the home can also play a factor in cost, says Nieuwkoop. If you build a home that is standard in design, you may pay less than if you build a custom home with unique design or special features. If you design a truly custom home, you may also need to hire an architect to draft a design. Hiring an architect can add another 15 or even 20 percent of costs to your total project.
  • Siding: What you choose to cover the exterior of your home can play a big role in your total price. If you choose a custom stone exterior, you may pay more than you would if you choose vinyl siding instead.
  • Landscaping: Will you opt for an elaborate outdoor landscaping scheme or some simple greenery? Your landscaping choices will play a role in the costs of your home as well as ongoing outdoor maintenance. You’ll also pay more for a fenced yard.

Building vs. buying

Building a home comes with pros and cons that are entirely different from the factors that lead people to purchase an existing home. Before you choose to build or shop among homes already in your area, make sure to consider the advantages and disadvantages of both scenarios.

Pros of building your own home

  • Less competition: According to the National Association of Realtors, existing homes stayed on the market for an average of 34 days nationwide before being sold in October 2017. In “hot areas” of the country such as San Francisco, San Diego, Boston, and San Jose, however, houses — especially those in an affordable price range — tend to go under contract in less than a week, it notes. By selecting your own lot and building a home, you can avoid stiff competition for existing properties and still get the home you want.
  • Everything is new: “Many people love the idea that everything in their house will be brand new when they build,” says Nieuwkoop. Having new fixtures, a new roof, new appliances and a new HVAC system may also mean you’ll have fewer repair bills during the first few years of homeownership.
  • Choose the location of your home: Building a new home on a lot you choose puts you in the unique position of selecting exactly where you’ll live. This can be advantageous if you hope to live near work or near public transportation, or if you want a lot with a certain type of view. “Do you want to back up to a lake or woods?” asks Nieuwkoop. “When you build, you get to decide.”
  • Select your own floor plan and finishes: Whether you build a custom home or select a floor plan through a builder, you get to choose how your new home is set up — including your floor plan. You may even be able to select your own finishes including your paint color, countertops, flooring and cabinets.

Cons of building your own house

  • Moving delays: Building a home often means longer delays when it comes to moving, says Nieuwkoop. “Building a home can take as little as two months all the way up to a year,” he says. If you want to move quickly, this can be a deal-breaker.
  • Building surprises: Especially if you design a custom home, you may not know exactly how the floor plan flows until your home is already built, notes the expert. “With a custom home especially, you may end up with something different than you envisioned.” Fortunately, this isn’t typically a problem with larger builders and developers since they often have model homes you can walk through, he says.
  • Pricing surprises: With custom homes especially, pricing can easily surge — especially if you make changes as the plan moves along, says Nieuwkoop. Plus, there are added costs that come with building that many people forget. Adding window blinds and treatments can add up, as can new décor, shelving and other interior fixtures that don’t come in the home price. Builders rarely put a fence in the yard, so that’s another expense to consider if you want one.
  • Less negotiation power: You may be able to negotiate the price on an existing home if a buyer is motivated to sell, but there may be less wiggle room on the price of a new home.
  • Construction traffic: If you’re building in a new neighborhood, you may deal with ongoing construction traffic for months or even years.

Pros of buying an existing home

  • Save money with existing features: Existing homes tend to have a lot of additions and upgrades made already, says Nieuwkoop. You may already have mini blinds, a privacy fence and appliances, for example, which can help you save money.
  • Move in quicker: “Although it can take a few months to close on an existing home and be able to move in, the timeline until move day is still faster with an existing home,” says Nieuwkoop. If you need to move quickly, you can typically do so faster if you buy instead of build.
  • Property maturity: Existing homes tend to have more mature trees and landscaping, which could be advantageous if you don’t like the idea of growing new grass on your own.
  • No construction zone: If you’re buying a home in a mature neighborhood, you may not have to deal with ongoing construction issues like you would with a new build in a new neighborhood.

Cons of buying an existing home

  • Lack of customization: You don’t get to pick out the floor plan or fixtures when you buy an existing home. You get exactly what is there already, which may or may not be what you want.
  • Costs to upgrade: If you buy an existing home that is out-of-date, you may need to spend considerable sums of money to make important updates or replace out-of-date fixtures.
  • Hidden problems: Existing homes may have problems you don’t see, says Nieuwkoop, adding that home inspectors don’t always find every issue. “If there was a water leak in the home and the seller replaced the drywall without actually fixing the issue, you may not find out you need costly repairs until after you move in.”

Who it’s best for

According to Nieuwkoop, building is best for individuals and couples who are very detailed and know exactly what they want. Building is also ideal for people who don’t care as much about cost as long as they get a brand-new home and the ability to pick and choose every finish and feature.

“Building is also best for buyers who are patient and willing to endure some bumps along the road,” says the builder. “If you’re high stress and don’t want to deal with any issues, you may be better off buying a newer existing home.”

5 steps to building a house

While the process of building a house can vary slightly depending on whether you design your own custom home or work with a developer, the main steps to completing the process are the same. Fortunately, Nieuwkoop helped us outline the five steps to building a house from beginning to end.

Step 1: Create a budget.

Before you decide to build or buy a home, it’s crucial to know how much you can afford to spend. The best way to come up with a housing budget is to see a mortgage broker or apply for a mortgage online, to see how much you can afford to borrow. You should also get pre-approved for a mortgage, says Nieuwkoop. That way, you’ll be ready to work with a builder when you decide what you want. You can compare mortgage offers online with LendingTree, MagnifyMoney’s parent company.

Step 2: Purchase land or select a lot.

Once you know what you can afford (house and land included), it’s time to find a lot in an existing community or buy land you plan to build on. Keep in mind that the price of the land you buy will need to be included in your mortgage amount unless you plan to buy the land in cash separately. If you’re choosing a piece of land that hasn’t been developed, you should also ask your builder about the costs of adding utilities to the property, cutting down trees, or leveling the land.

If you’re buying from a developer or builder who is overseeing the construction of a new neighborhood, it’s possible the price of your chosen lot will be built into the price of the floor plan and home you select, says Nieuwkoop. Either way, now is the time to talk through land costs with a builder and decide where you want your new home to be.

Step 3: Develop floor plans and designs.

If you’re working with a builder, chances are good they’ll offer a range of floor plans and new home designs you can choose from. If you’re building a custom home, on the other hand, you’ll likely need to hire an architect to create a realistic housing design that encompasses all the features you want.

Either way, you need to nail down your ideal floor plan and design at this stage. Decide how many bedrooms and bathrooms you want, along with the general layout of your home. From there, you can select or design a housing plan that fits your budget and style.

Step 4: Select finishes, features, and appliances.

Once you’ve chosen the layout of your home, you still need to choose what goes inside. Work with your builder to decide on the interior finishes in your home, from the cabinets in your kitchen to your light fixtures, plumbing fixtures, flooring, and paint colors.

Step 5: Watch your home being built.

Once your home is commissioned and ready to be built, you can watch as the process takes place over the weeks and months. Nieuwkoop says that, ideally, your builder will let you walk through the home during various stages of the process. By walking through, you may be able to discover and point out issues that need to be fixed, such as incorrect fixtures or design problems.

How to finance the build

According to mortgage advisor Jeremy Schachter of Pinnacle Capital Mortgage, the process for financing a new build is similar to the process of buying an existing home.

When you build a home, it’s crucial to get pre-qualified with a bank or lender. During this process, the lender will take a look at your credit score, income, assets and debts, then use those factors to determine how much you can borrow.

The biggest difference with a new build, says Schachter, is that you’ll likely need to get pre-approved for a mortgage once and then start a portion of the process over again. “You’ll need to submit financial statements, a credit report, and pay stubs to get approved to build a house, but you’ll likely need to resubmit all this information again if the process takes several months,” he says. Schachter was clear that the final home closing doesn’t take place until the house is completed, and that this is when you’ll start making mortgage payments.

Fortunately, Schachter says, many lenders will let you lock in the interest rate on your home loan for up to a year when you’re building a home. But you should always check and ask about your APR to make sure you’re not stuck with a higher interest rate if your new build takes several months and rates surge during that time, he says.

What type of home loans can you use?

Schachter notes that consumers can use any type of home loan to build a property that they could use to buy a traditional home. For example:

  • VA loans: To qualify for a VA loan, you must have satisfactory credit, sufficient income, and a valid Certificate of Eligibility (COE) based on your level of service. You must also plan to live in the home full-time.
  • FHA loans: You can apply for an FHA construction loan to finance a new build. To qualify for an FHA loan, you’ll need at least 3.5 percent as a down payment, a credit score of 580 or higher, and proof of income. You may qualify for an FHA loan with a credit score lower than 580, but you’ll need to make a larger down payment. Lenders will also look at your debt-to-income ratio — a figure determined by taking all your debt payments and dividing them by your gross monthly income. If you have $3,000 in bills each month and your gross monthly income is $5,000, your debt-to-income ratio is 60 percent. Generally speaking, lenders want you to keep your debt-to-income ratio under 43 percent, including all housing payments.
  • Conventional home loan: Requirements for a conventional mortgage can vary, although you typically need a good credit score (FICO score of about 740 or higher) to qualify for a loan with the best APR. Lenders also look at your employment history, income and debt-to-income ratio.
  • Construction loans: Schachter notes that individuals building a custom home may need to get a special “construction loan from a lender or bank.” These loans cover the initial costs of building a house, including the lot, building materials and architect fees. Schachter notes that construction loans are typically short-term loans with variable interest rates that are good for less than a year. Ultimately, construction loans are converted to permanent home loans once the construction process is complete.

The post How Much Does It Cost to Build a House? appeared first on MagnifyMoney.

A Guide to Understanding Bridge Loans

Getting a bridge loan
iStock

Buying a new home before you can sell your old one can present quite the financial conundrum. This is mostly because you have to come up with the cash for a new property when you don’t have access to the home equity you have already built up in your existing property. That’s where a bridge loan comes in.

What is a bridge loan?

Bridge loans promise to fill the gap or “provide a bridge” between your old residence and the one you hope to buy. They accomplish this by providing temporary financial assistance through short-term lending.

Unfortunately, bridge loans come with pitfalls, some of which can be costly or have long-term financial consequences. This guide will explain the good and the bad about bridge loans, how they work, and some alternative strategies.

How does a bridge loan work?

While bridge loans can come in different amounts and last for varying lengths of time, they are meant to be short-term tools. Generally speaking, bridge loans are temporary financing options intended to help real estate buyers secure initial funding that helps them transition from one property to the next.

Let’s say you found your dream home and need to buy it quickly, yet you haven’t had the time to prepare your current residence for sale, let alone sell it. A bridge loan would provide the short-term funding required to purchase the new home quickly, buying you time to get your current home ready for sale. Ideally, you would move into your new home, sell your old property, then pay off the loan.

Here are some additional details to consider with bridge loans:

  • Your current residence is used as collateral for the loan.
  • These loans may only be set up to last for a period of six to 12 months.
  • Interest rates are higher than those you can get for a traditional mortgage.
  • You need equity in your current home to qualify, usually at least 20 percent.

Also keep in mind that there are several ways to repay a bridge loan. You may be required to start making payments right away, or you may be able to wait several months. Make sure to read the terms and conditions of your loan so you know where your financial obligations begin and end.

Risks of taking out a bridge loan

Taking out a temporary loan so you can purchase a new home may sound ideal, but as with most financial products, the devil is in the details. While these loans can help in a pinch if you aren’t able to purchase a property through other means, there are notable disadvantages.

They can cost more than alternatives

David Reiss, a professor at Brooklyn Law School and the academic program director at the Center for Urban Business Entrepreneurship, says the biggest downside of these loans is the price tag. Because bridge loans are meant to work for the short term, lenders have a much shorter timeline for turning a profit. As a result, “they typically charge a few percentage points higher than what you would pay with home equity loans,” says Reiss. Not only that, but they come with closing costs that may be expensive, and can vary from loan to loan.

So, even if the loan is short-term, it will likely cost you more than borrowing the money through a traditional mortgage by selling your existing home first, or through other means.

You’re taking on more debt

Another inherent risk with bridge loans: You’re simply borrowing more money. “The loan is secured by your home, so you have another mortgage,” Reiss says. “If you don’t make payments, then you could face late fees and financial turmoil.”

You can’t predict when you’ll sell your home

And if you’re unable to sell your home and your new or old monthly mortgage payments are taking a big chunk of your income, you could have trouble meeting all your financial obligations.

Reiss offers one other scenario in which a bridge loan could spell financial trouble: if the real estate market sours.

“You might assume you’ll sell your home easily, but that isn’t always the case,” says Reiss. “Unexpected events can screw up your plans to sell your home, so if you end up carrying multiple mortgages, you could potentially end up in trouble.”

According to Reiss, taking out a bridge loan could easily leave you with three home loans — your old mortgage, your loan, and your new mortgage — if the housing market slumps inexplicably and you can’t sell.

“This may not be a problem temporarily, but it can cause financial havoc in the long run,” he says. “You’ll be stuck with the unexpected expense of carrying all these mortgages.”

Falling behind on payments can lead to foreclosure on your old home, your new property, or both.

Advantages of a bridge loan

Applicants who are well aware of the risks of this financial product may still benefit from choosing this option. There are notable advantages, Reiss says, especially for certain types of buyers.

They can give you an edge in competitive markets

Bridge loans are “the kind of loan you get when you need to move forward and you can’t do it any other way,” says Reiss. If you are absolutely dead-set on purchasing a property and struggling to make the financials work, then a bridge loan could truly save the day.

This is especially true in housing markets where homes are moving quickly, Reiss notes, since a bridge loan allows you to buy a new home without a sales contingency in the new contract. What this means is, you’re able to write an offer on a new property without requiring the sale of your old home before you can buy.

This can be quite advantageous “in a hot market where sellers are getting lots of offers and you’re competing against other buyers who are paying in cash or making offers without a contingency,” Reiss says.

Bridge loans may be more convenient than the alternatives

Reiss also says that, while there are other loan options to consider for buying a new home, they aren’t always feasible in the heat of the moment. If you wanted to purchase a new home before selling your old home and needed cash, you could consider borrowing against your 401(k) or taking out a home equity loan, for example.

Yes, these options may be cheaper than getting a bridge loan, Reiss acknowledges. The problem is, they both take time. Borrowing money from your 401(k) may take several weeks and plenty of back and forth with your employer or human resources department, and home equity loans can take months. Not only that, but it might be difficult to qualify for a home equity loan if your home is for sale, Reiss says.

“A home equity lender who catches wind of your intent to sell your home may not even loan you the money since it’s fairly likely you’ll pay off the home equity loan quickly, meaning they won’t turn a profit,” he says.

Bridge loans, on the other hand, could be more convenient and timely because you may be able to get one through your new mortgage lender.

Four good reasons to take out a bridge loan

With the listed advantages and disadvantages above in mind, there are plenty of reasons buyers will take on the risk of a bridge loan and use it to transition into a new home. Reasons consumers commonly take out bridge loans include:

1. You want to make an offer on a new home without a sales contingency to improve your chances of securing a deal.

The most important reason to get a bridge loan is if you want to buy a property so much that you don’t mind the added costs or risk. These loans let you make an offer without promising to sell your old home first.

2. You need cash for a down payment without accessing your home equity right away.

A bridge loan can help you borrow the money you need for a down payment. Once you sell your old home, you can use the equity and profit from the sale to pay off your loan.

3. You want to avoid PMI, or private mortgage insurance.

If most of your cash is locked up as equity in your current home, you may not have enough money to put down 20 percent on your new home and avoid PMI, or private mortgage insurance. A bridge loan may help you put down 20 percent and avoid the need for this costly insurance product.

“But you would need to net out the costs of the bridge loan against the PMI savings to see if it is worth it,” says Reiss. “And remember, once you have sold the first home, you could use the equity from that home to pay down the mortgage on your new home and get out of paying PMI.”

According to the Consumer Financial Protection Bureau (CFPB), you may have to order an appraisal to show you have at least 20 percent equity to get PMI taken off your new loan, and even then, it can take several months.

“So, we might be talking about six to 12 months of avoided PMI payments if you were planning on using the equity from your old home to pay down the mortgage on your new home,” says Reiss.

4. You’re building a new home.

A bridge loan can help you pay the upfront costs of building a new home when you aren’t yet prepared to sell your old one because you still need a place to live.

How to qualify for a bridge mortgage loan

Because bridge loans are offered through mortgage lenders, typically in conjunction with a new mortgage, the requirements to qualify are similar to getting a new home loan.
While requirements can vary from lender to lender, you commonly need to meet the following criteria for a bridge loan:

  • Excellent credit
  • A low debt-to-income ratio
  • Significant home equity of 20 percent or more

Typically, lenders will approve bridge loans at the value of 80 percent of both the borrower’s current mortgage and the proposed mortgage they are aiming to attain. Let’s say you’re selling a home worth $300,000 with the goal of buying a new property worth $500,000. In this example, across both loans, you could only borrow 80 percent of the combined property values, or $640,000.

If you don’t have enough equity or cash to meet these requirements — or if your credit isn’t good enough — you may not qualify for a bridge loan, even if you want one.

Fees and other fine print

Before you take out a bridge loan, it’s important to understand all the costs involved. Here are some fees and fine print you should look for and understand:

Fees

Since bridge loans vary widely from lender to lender, the fees involved — and the costs of those fees — can vary significantly as well. Common fees to look for include an origination fee that can be equal to 1 percent or more of your loan value. You will also likely be on the hook for closing costs for your loan, although the amount of those costs can be all over the map based on the terms and conditions included in your loan’s fine print. As example, Third Federal Savings and Loan out of Cleveland, Ohio, offers a bridge loan product with no prepayment penalties or appraisal fees, but with a $595 fee for closing costs. Borrowers may also be on the hook for documentary stamp taxes or state taxes, if applicable. Make sure to check your loan’s terms and conditions.

Prepayment penalties

While it’s unlikely your loan will include any prepayment penalties, you should read the terms and conditions to make sure.

Payoff terms and conditions

Because all bridge loans work differently, you need to be sure when your loan comes due, or when you need to start making payments. You may need to make payments right away, or you might have a few months of wiggle room. Because there are no set guidelines, these terms can vary dramatically among different lenders.

Tips to sell your home quickly and avoid a bridge loan

If you’re on the fence about getting a bridge loan because you’re worried about short-term costs or the added layer of risk, try to sell your home quickly instead. If you’re able to sell, you may be able to access your home’s equity and avoid a bridge loan altogether, while also eliminating the possibility of getting “stuck” with more than one home.

We spoke to several real estate professionals to get their tips for selling your home quickly. Here are their best tips for getting your home ready to sell in a short amount of time:

Tip #1: Do some quick outdoor cleanup and landscaping work, then try to make your home as neutral as possible.

“To get people inside, they need to like the outside of your house,” says Nancy Brook, a Realtor who sells properties with RE/MAX of Billings, Mont. “Trim trees and shrubs, treat weeds, and mow and trim lawns.”

You should also make sure that there’s no chipped or peeling paint, she recommends. “And if your home is anything but a neutral color, you should seriously consider painting it.”

Tip #2: Get rid of half your stuff (or more).

As Brooks notes, most real estate agents suggest that sellers pack up most of their personal items and remove them from the house when they’re trying to sell. This helps people declutter while also making their property more appealing to people who might be turned off by someone else’s personal photos and items.

“Pack up or get rid of rid of paperwork, knick-knacks, personal photos and collections,” says Brooks. “Any furniture that obstructs a walkway should be eliminated. Get rid of any unnecessary dishes, pots, pans and small appliances in your kitchen. All the excess gives a junky appearance.”

Tip #3: Deep-clean from top to bottom.

While cleaning seems like an obvious first step, it is often neglected, notes Trina Larson, RE/MAX Realtor and selling specialist from Potomac, Md.

“You would never purchase a dirty car or a dirty new jacket,” she says. “Get everything as clean as possible, and try to make your house look brand-new.”

Items on your to-clean list should include corners, edges of baseboards, light fixtures, windows inside and out, your home’s siding and anything that isn’t in pristine condition.

Tip #4: Get rid of off-putting smells.

If you want to sell quickly, your house should smell clean and inviting, Larson suggests. “Your first step is to remove every offensive odor,” she says.

Go through each room and take inventory of what you smell. “Pet urine is especially heinous, and there is only way to remove it,” she says. “You have to go in and replace the carpet where the accident happened. Although it might seem like an expensive task, it is worth every penny. No cooking or animal odors.”

Basic cleaning can also help remove smells. The cleaner your home, the fresher it will seem to potential buyers.

Bottom line: Is a bridge loan worth considering?

If you want to buy a home quickly and don’t have time to sell your home, a bridge loan could help. Likewise, bridge loans can be a good option for people who are moving or building a new home and need the capital to make the sale go through regardless of cost.

On the other hand, such loans may not be the best choice for consumers who don’t want to risk getting stuck with two homes and multiple payments. They’re also a poor choice for buyers who don’t want to pay any additional closing costs or interest payments to get in the home they want.

In the end, only you can decide if the risk of getting a bridge loan for your new home is an acceptable one.

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