New Home Building Budget

New Home Building Budget - It's Easy to Blow It Up

DEAR TIM: I am scratching my head about my new home project. I am trying to determine a realistic building budget, how to stay within that budget and how much house I can afford. How do I know how much I am allowed to spend on different fixtures and items within the house? Are there industry guidelines that I can follow? Mike M., Simi Valley, CA

DEAR MIKE: Wow! This is a common problem that befuddles many a homeowner. There is actually a straightforward solution, although it will take a few phone calls or possibly some field trips. If you did so-so in grade school math, it will really be a breeze.

You should absolutely use my New Home Construction Estimator to help you get close to the actual finished price of your new home. GO HERE to order it.

The first thing you need to do is to create your own building budget. This is the amount of money you can afford to spend on your new home. Often the best way to do this is to visit a bank or other lending institution. They can pre-qualify you with respect to just how much money you can borrow in today's lending environment. Add to this loan amount the equity in your existing home and you have a not-to-exceed number. The equity in your existing home is the amount of money you will have left over after you pay off your existing mortgage and pay any sales commission.

As crazy as this sounds, I would not use this number as my building budget. Surprises, cost overruns, and price increases can create financial hardships during a building project. I suggest you create a 10 to 20-percent slush fund to cover these contingencies. This means that you should multiply your not-to-exceed number by 0.80 to arrive at your CONTRACT SUM.

Remember, you'll have to add the cost overrun items to your contract sum to get to your FINAL COST.

Here's an example of the math.

Pre-approved loan amount: $500,000

Equity in your existing home: $250,000

TOTAL AMOUNT you can afford: $750,000

$750,000 x 20-percent slush fund = $150,000

$750,000 minus slush fund = $600,000

Your contract with your builder should NOT EXCEED $600,000 for you to stay within your budget. If you only have a 12.5% cost overrun, then you'll have a nice amount of dry powder once you move into your new home. I'd take $40,000 of the $75,000 you have left over and send it to the lender with your first loan payment. Over the life of the loan, this addition of principal early on will save you vast amounts of interest on the loan.

Determine Square-Foot Building Costs

With your budget in place, you can now call Realtors or visit new home builders to see if the amount of money you have available will "buy" the necessary space you need. If you fall short for some reason, you may have to purchase an existing home. Pre-owned homes almost always provide more space/square footage for the dollar.

Allowances are Budget-Busting TRAPS

If you are still in the building game, most builders provide allowances for fixtures and other items that you need to select. Examples of these are carpeting, cabinets, counter tops, faucets, hardware, etc. The problem is that sometimes these allowances are too low or people spend too much on one item and there is not enough left in the overall budget to fund the remaining purchases.

One method of determining realistic amounts for different allowances is to break the cost of the entire house down into its separate parts. Each aspect of building a new home can be represented as a fraction or percentage of the total cost. Lenders know this as do the appraisers that verify construction loan payments. As work progresses on your new home, they assign a value to each completed component.

Get the Secret Checklist

These appraisers work from a checklist that tells them what things are worth on a typical new home. For example, the footings and a full basement foundation may equal 15 percent of the total structure cost. Kitchen cabinets in your market may represent approximately 2 percent. All of the electrical fixtures could amount to 1 percent of the total cost of the home. Your bank's appraiser may supply you with a percentage breakdown list if you ask them for it. You can also get cost breakdown figures from different national construction cost books that are updated annually.

My New Home Construction Estimator has all the items you need to consider when building a new home. Purchase it now.

Using the list and your actual building budget, begin to do the math to see what you can spend in the different areas or to see if the builder has assigned allowances that are realistic. You may discover that his allowances are low for some reason. Remember that the percentage figure includes both labor and material for any given category. Labor to install many allowance-type items can consume up to 30 percent of the total cost you arrive at. Be sure to keep this in mind as you start to make product selections.

If you are like me you have dreamed of owning a home away from home. Imagine when the weekend comes, hanging out in a hammock at your own lakefront cottage, boating, antiquing in a charming little town, or whiling away an afternoon on your ocean-view porch. If you have imagined these things you need Better Homes and Gardens Second Home.

This inspiring volume will help you turn your second-home fantasy into the real thing. This book will take you through tours of gorgeous homes to see how other people have created their own great escapes. There are expert tips on everything from real estate shopping to building, remodeling, and decorating. There are hundreds of spectacular color photographs of beautiful homes and great locations. As for me, I'll keep dreaming ... until those lottery numbers come through or some forgotten relative leaves me an unexpected inheritance, the book will have to suffice.

Column 252