By Jeff Gomez
Before you look at model homes, meet with sales agents, or even browse online, it is important to know whether you are ready for the financial commitment of building a home. There are three periods during the building process that will ultimately end up costing you a significant chunk of change. The first is your earnest money to lock up the lot, and to show that you are serious about building. The second is the construction deposit. This usually comes after the design process and before construction begins. The final large transactions will be at closing and are called the down payment and closing costs.
Once you’ve paid your earnest money, you will begin the design process. This is where you get to decide the options, colors, and materials that will make up the one-of-a-kind character of your home. Your design preferences are unique to you, and will not match what somebody else might have chosen. This personalization is what makes building your home so rewarding! However, it also creates a risk for the builder. The risk is that once a home has been personalized, it might not be as desirable to others as it is to the one who personalized it. If a builder is going to commit to building your dream home, the builder expects that you will commit to buying it at the end of construction. Nothing makes for a better promise than non-refundable cash.
Builders will usually require some amount of non-refundable cash as a commitment to purchase the home when it is finished. This amount can vary widely. At Vesta Homes, we use a formula that considers the base price of the home, your personal selections, and our expert lender incentives. Generally, we’ve seen the final amount range from about $10,000 up to $30,000.
They are deposits after all…
While these up-front costs may feel expensive, keep in mind that they are deposits. This means it is still your money! We are just holding on to it so you don’t walk away. The good news is that at the end of the process when it is time to close all this money will go towards helping you close on the home.
Up to this point, we’ve been able to lean on our own policies at Vesta Homes to give you an idea of what to expect in terms of cash costs. Closing costs will depend almost entirely on your title company. Closing costs is a term that refers to the bundle of fees you’ll incur at closing. These can include, but are not limited to: origination fees, appraisal fees, title insurance, prepaid expenses, insurance, and HOA fees. You can expect to pay a few thousand dollars, or 1-2% of the home value, in closing costs.
For most home loans, your lender is going to require you to put money down. Your down payment will be a cash cost that is unique to you. The general rule of thumb is the higher your down payment, the lower your monthly mortgage payment will be. In addition, the higher your credit score, the lower the required down payment will be. For a typical conventional loan, expect to pay at least 5%. Different loan types will have different down payment requirements. FHA loans require 3.5% down for buyers with good credit. If you are eligible for a VA or USDA loan, you might not need to pay any money down at all. Your lender will help you choose the best possible option for your situation, which is one of the reasons Vesta Homes trusts its expert lenders.
Let's run through an exercise:
A townhome may require much less cash to build, possibly as low as $18,000 or so. A larger and more expensive home could easily require more than $30,000. Using VA or FHA loans can also reduce the amount by several thousand dollars.
It would be best to have that amount available in your bank account before signing a contract, but how you decide to pay for these costs is ultimately up to you. For those who are having difficulty with the construction deposit, please check out our Construction Deposit FAQ. If you need help financing your cash to close, sometimes it is possible for the seller to agree to pay some closing costs by raising the price of the home accordingly.
Set a goal
Now that you know how much cash it takes to build, set a goal! Save up as much as you can. Decide when you want to build your new home, create a plan, and make it happen.
“Don’t let your dreams be dreams.”
Oh, and if you are already there (or almost there), come talk to us and let’s get started!
There’s a contact form below.