Assess Your Finances, Job & Family Situations, and the Local Housing Market to Find Out
There are many reasons people choose to build a home instead of buying a pre-built one. Building allows you to customize your home to your exact needs and preferences, protects you from bidding wars, and allows you to enjoy an energy-efficient home with minimal maintenance or repairs in the near future. However, people still naturally wonder if they can afford to build a home.
We have good news: building a home may be more attainable than you think. We will discuss the things to consider when figuring out whether you have the financial ability to build your dream home. From analyzing your finances to considering your family situation, there’s a lot to think about – but don’t worry. We’re here to help.
Assess Your Current Financial Situation
If you’re considering building a home, the first thing to do is evaluate your savings. You need to know just how much money you will have available to cover a down payment, closing costs, and emergencies in your new home. This will give you a good idea of how much you can afford to put toward the build without jeopardizing your finances.
Next, calculate your debt-to-income, or DTI, ratio. This is the part of your monthly income that must be used to pay off things like your rent or mortgage, car payment, alimony or child support, student loans, and credit card debt. If you need to apply for a loan to buy the land to build on, lenders will typically want to see a DTI of 43% or lower. Remember, when it comes to DTI, lower is always better.
Finally, know your credit score. If you have good credit, lenders will usually offer you more favorable loan terms. While a credit score of 640 is considered decent, most lenders like to see a credit score of at least 740.
Consider Down Payment Options
If you have already purchased a plot of land upon which to build, then you can skip this step. Otherwise, keep in mind that the down payment of a land purchase will more than likely be the most expensive part of the build. Traditionally, the lender will require a down payment of at least 20% of the total purchase price. However, there may also be loans available through alternative lenders that will allow you to start with a lower down payment.
Plan for Future Monthly Payments
To ensure you can afford to build a home, you’ll need to calculate how much the monthly payments on your land purchase loan will cost you, as well as payments on any other debt you need to take on to complete the build. You should also add the property taxes where you plan to live as well as your homeowners insurance costs and HOA fees if applicable. Make sure this is a number you’re comfortable paying not just now, but in the future.
Assess Your Job Stability and Security
How long have you been working for your current employer? Lenders like to see a steady work history when considering land loans for new construction. You should also analyze your specific position’s near-term prospects as well as the industry you’re in. Make sure there’s not only security over the long term, but also the potential for a higher salary. Consider too whether your job is likely to require you to move in the near- to medium-term, as you’re obviously making a large investment in a particular community.
Consider Your Family Situation
Do you plan to start a family or add to it? Make sure the plot you’ve chosen is large enough for a home that will meet your family’s future space requirements. Try to consider any likely lifestyle change that could happen down the line and how it could affect your living space needs. For instance, if you plan to age in place, ensure that your home will be able to accommodate mobility aids like a wheelchair, walker, or stair lift. Finally, if you haven’t already, you should also consider the job stability, security, and likelihood of relocation for all other adults who will be living in your home and contributing to expenses.
Be Prepared for Market Fluctuations
The last step you should take is to familiarize yourself with housing market trends where you plan to build, including any future predictions from reputable sources. This research will help you achieve the best value for your land purchase and home build. Flexibility in your purchase timeline will be to your advantage as well, as you can wait until the proverbial iron is hot enough to strike.
Count on Davis Custom Homes to Help
Davis Custom Homes is a full-service home building team serving Iowa, Nebraska, and the Sioux Falls, SD and Houston, TX areas. We work directly with clients to make their home dreams become reality. Our team can help you with both acquiring land for your custom build and the build itself. We are locally and family owned, so we’re always just a phone call away whenever you need something or have a question. As fully licensed and insured construction experts, we ensure every aspect of your build will achieve the very best results. And once your build is done, you’ll enjoy peace of mind from having a 10-year Quality Builders Warranty backed by Liberty Mutual.
Contact Davis Custom Homes today, and let’s get started on your dream home