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Building a house from scratch sounds like a romantic adventure but without proper preparation it can turn into a nightmare. Learn what two things you need to have figured out BEFORE you build your own house.
Let’s say you have grand visions of building your own home from scratch. You want to be an owner builder! You’ll have a great design that fits your family, you’ll construct it just the way you want it, and you’ll move in to a peaceful, idyllic life. Right?
Slow down there! Before you even start designing the home of your dreams, you need to take a hard look at your finances.
There are two HUGE money issues you need to tackle before you even start. Let’s break down the basics.
The Two Big Money Issues to Know BEFORE You Build a House
#1: How to FUND Your Build
Seems obvious right? Then again, chances are good you’ve been dreaming of floor plans and designs before considering what you can actually afford to build.
Many people choose to be owner builders for the ability to save money. You can save ridiculous amounts of dollars just by not paying for a general contractor. You stand to save even more by having total control over the materials you use and choosing how much of the work to do yourself.
But HOW will you pay for it? And what can you actually afford?
As an owner builder you have two main options: obtaining a construction loan or paying cash as you go.
Construction Loans for Owner Builders
It can be quite difficult for owner builders to obtain construction loans. Most banks or other lenders are hesitant to take the risk of lending out a large sum of money to someone who is not a licensed contractor.
Owner builders typically do not have the construction background that a general contractor or construction firm has, nor to they have the licensure.
If you DO find someone willing to lend to you, be prepared to have a higher down payment than you might for a standard construction loan or a conventional mortgage.
Additionally, don’t expect that loan to cover everything. You will need a large nest egg on hand to cover your closing costs and incidental fees, not to mention all of the little discretionary purchases you’ll certainly make in the course of the build.
Paying With CASH
Paying for your build with cash as you go is a great option if you have the money. You avoid jumping through the hoops of getting a loan (i.e. credit checks, providing massive amounts of documentation) plus you stand to save money by avoiding closing costs and fees. You can also avoid the “draw schedules” that construction loans require. Paying cash affords you freedom.
BUT, if you go this route you need to make sure you have plenty of cash on hand to pay for larger items as they are needed. I’m talking things like the roofing and large household systems. Our home had big ticket expenses like our cistern, septic, and solar power system that all needed to be purchased at very similar times.
Fortunately you can find a middle ground, which is what we ended up doing.
We paid for the majority of our build with straight up CASH. This is money that we had leftover from the sale of our previous home, plus money we were able to put away month after month.
Unfortunately, life has a way of throwing you curveballs. Even the best laid plans can go awry. While we really wanted to finish our build for cash, there was no way we would finish it within the year at the pace we were going and with our changing family needs.
We were able to get a loan from the lender we used for our land purchase that covered the gap between what we had already completed and what needed to be finished. Working with them, we managed to find a solution that let us keep our costs low while avoiding draw schedules.
We still ended up paying cash for a lot of things since then, but it allowed us to get our house finished enough to move in.
If you want to cover the gap and can’t pursue a construction loan, you might look into standard lines of credit through banks and credit unions.
The interest rate will likely be much higher than on a mortgage, but should also be a bit lower than tacking it onto a credit card. Research the options available in your area and have contingency plans ready ahead of time.
So if financing is the first big financial hurdle, what’s the second? KEEP READING, because I’ll bet it’s one you haven’t thought much about.
#2: Insuring Your Build
Most people get so wrapped up in finding house plans and figuring out how to fund the build that they forget all about insuring it until it’s crunch time.
You need to address this WELL before you get started with the build itself!
For starters, if you choose to get a construction loan you will be required to show proof of insurance to your lender. They may also require for those payments to go through escrow (though that varies from lender to lender).
Talk to an insurance agent about your local requirements for insuring a home as it is being constructed by an owner builder. Requirements will vary from state to state and across different types, sizes, and styles of houses.
You will likely need any of the following types of policies:
- Builder’s Risk
- General Liability
- Worker’s Comp (unlikely unless you’re making someone an employee of your build, which you probably aren’t)
You also need to ask what kind of documentation you need to provide on your home, if any. Additionally, clarify what types of homes they will or won’t insure. This can be helpful if you plan to build a smaller home or use a natural building method like we did.
For example, I talked to one blog reader who said he couldn’t get anyone to insure his build of a small house. If you’re thinking of going small or tiny this is something to consider!
In our case, since we built our home with cordwood masonry we had to be specific with what kind of materials our house was made out of. One large national company we worked with wouldn’t insure a “log home” but had no problems with a “masonry home”. Since our home is technically a style of masonry they gladly insured us for a nominal fee.
I dive a bit deeper into your insurance considerations (and loads of other stuff too) in our free owner builder guide, which you can get by filling in the form below: