Before You Build: Know Your Budget
Creating a budget for your new home may be a little more complicated than you realize. There are numerous factors to consider and getting into the building project is not the time to figure out you won’t be able to afford your home.
Whenever I need economic advice, I go to Dr. Keivan Deravi. Dr. Deravi is a distinguished Economics professor at Auburn University of Montgomery and is responsible for the Economic forecast for the state of Alabama. Dr. Deravi knows economics, budgets and is always gracious with his knowledge. He shared several tips and ideas with me on creating a budget.
Income & Budget
Calculate your take home pay for your household. Your mortgage payment should never exceed 27% of your net income. Taxes, utilities, insurance, maintenance and incidentals will then take up another 10-11%. So your total housing expense will be around 37% of your income.
If you don’t already have a budget for your home, you should. Your budget should always include a spending plan.
Clothing 5% Cars & Repair 15% Groceries 12%
Savings 5% Debt Repayment 5% Medical Expenses 5%
Life & Disability Insurance 5% Entertainment 5%
Now that you know how much you can afford, you need to know how much house you can afford. It is truly aggravating loving a house plan and then getting estimates to find out it is not in your price range.
Get a “guestimate”
Contact local builders who are building the size and style home you would like to build and ask them how much they charged per square foot. Don’t forget to ask them about pricing on garages, patios and decks as the price will be slightly lower but it needs to be added to your construction cost. Too many times consumers buy house plans and the square footage stated is only for the heated and cooled space and there home ends up costing thousands more because of added areas not calculated on the house plans. Make sure you add all areas to get a good “guestimate” of what your home will cost.
You can also visit new homes for sale that are similar to your style and size. Take the price of the home and deduct the price of the land and divide that amount by the square footage of the home. This will give you the construction cost per square foot.
All of the below items need to be added to your per square foot cost.
- Private Septic or Public Sewer
- Private Well or Public Water
- Electrical Service set up
- Gas Service
- Drawings & Specifications Development
- Permits & Fees from Building Departments
- Site Access: Street Culvert & Driveway
- Excavation: Backfield & Grade
- Foundation Slab or Wood
- Patios & Sidewalks
- Decks Porches & Veranda
Always leave 5-10% of your purchase price unbudgeted for changes that you may make during the building process. This is such and important tip. Trust me when I say that changes will be made and you will need the extra money to pay for the changes. The finished cost of a home is almost always more than the original price.
A good down payment is 20% of the contracted price. Some lenders may want you to take out mortgage insurance if you don’t have the 20% down payment. This is a guaranty that insures lenders against the loss in the event the borrower defaults on a mortgage. Save your 20% so you can avoid mortgage insurance premiums as this could be a large and unnecessary financial burden.
Future Cost & Future Building
Put a little money back for the future as every 10 years you will have repair expenses that will equal one year of your mortgage payments. And if you are just thinking about building and you are in the planning stage, remember the cost of building usually increases 3%-6% per year. Be sure and include this into your cost estimate if you will be building a year or so away.
Knowing your construction cost and how much house you can afford will make your building process less stressful and will help you maintain your budget for years to come.
For loan information: http://yourASEcu.com/loans