You’ve looked around the Houston housing market and simply cannot find a home that fulfills your and your family’s must-haves. Buying a home outright is pretty straightforward. However, building a custom home requires much more planning–building a budget that includes the amenities and space you need with the funds you’re able to secure.
How much budget will you need for the home you want? Much like your custom home, you’ll build your budget from the ground up, starting with a good foundation.
Unless you’re able to use cash for your custom-built home outright, you’re going to need to figure out how much you’ll be able to borrow. Before approaching a bank, however, start with making note of your credit scores, income-to-debt (ITD) ratio, and how much you will be able to put on a down payment. Debt includes credit, your current mortgage, rent, and student loans. A passable ITD is no more than 36% and a minimum down payment is usually 20%, but it depends on the lender.
Many lenders and builders offer different versions of online calculators that can give you at least an idea of the size of the loan you’ll be able to secure and at what rate, based on some general financial information including the monthly payment you can afford. Essentially, the better your financial foundation–like a good credit score, low debt, and a decent down payment–the more you’ll be able to borrow.
At this point, you’ll interview architects and builders. Keep in mind that you will get what you pay for, and your family home is no place to cut corners on the quality of design or construction. You’ve likely already dreamed up the custom home you want to build, so make sure to have a list of wants and needs for your custom home.
Give your architect a lot of details for an estimate that’s closer to the end cost. Are you hoping to include mostly high-end finishes, fixtures, and features, or are you open to selecting a mix of builder grade and high-end to reign in cost? Get the designing process underway, then be sure to get pre-approved for a loan to know exactly how much you will be able to spend to be able to finalize your design.
Financing a construction loan is different from a home loan. A construction loan will be used to buy land if you don’t already own it, and pay all construction expenses, design fees, permits, and closing costs. There are two different types of construction loans to consider: a construction-to-permanent loan and a construction-only loan.
A construction-to-permanent loan, or one-time close loan, will automatically transition to a permanent mortgage. The construction-only loan, or two-time close loan, will cover the construction expenses and permits.
With a construction-only loan, once your home is built, you will have one year to apply for a regular mortgage. The benefit of this is you will have the opportunity to seek better terms now that you have equity.
Many will compare two or three lenders, but up to five is ideal. Also, expect construction-only loans to be slightly higher than construction-to-permanent loans. Rates, closing costs, fees, and discount points will differ across lenders.
Lenders will have three days to send you an offer. Once lenders pull your credit, there is a 45-day window to apply for all of your applications to count as one credit inquiry. This makes for a short turnaround time to finalize your design, have plans ready to go, and sign contracts, however, so keep this in mind. After you have your construction and design contracts in hand, along with the completed plans, detailed budget, and other documents, you will be able to apply for your loan.
Here are the individual budget items to keep in mind when planning to build a custom home in Houston.
If your land in Houston is included in the construction loan, you will need to deduct this cost from your construction budget. Otherwise, the entire amount you borrow can be dedicated to the design and construction of your home.
Architects charge for their design services in a number of ways, with the most common way being a percentage of the total project cost. Deduct this fee amount from the amount you will have to build your construction budget.
Your architect and builder should work closely together at this point to make sure the costs are accurate. Each professional will have important industry knowledge that will keep your budget under control and as predictable as possible. That being said, the percentage of your budget that is dedicated to every part of the construction phase of your home can, and likely will, vary depending on your architect and builder, as well as design choices.
Your builder can charge between 15% and 25% of the construction costs to build your custom home. It’s worth repeating that you will get what you pay for, so anything less should raise a red flag.
This can vary depending on how ready or raw your land is. But typically, this includes everything your lot needs to be ready for the construction of your home. To control this line item, be sure to choose land that is connected to city services. Site preparation includes:
This cost includes your foundation and further land preparations, such as excavation, backfill, and rough grade for drainage during construction.
During framing, your home is beginning to take shape. These costs include:
The amount you are allowed with exterior finishes will affect the overall style of your home’s curb appeal. This is where a balance in grade and material choice will take place and ultimately communicate the exterior style of your home. Exterior finishes will include:
Your home’s major systems include everything in your home that keeps it running and livable. Major systems are considered:
This is a notably large portion of your budget and really makes your house feel like a home. It is especially important to be mindful of your choices pertaining to grade level and quality here. Some items are a given, like appliances, while others are based on your preferences, like your flooring. The best way to approach these items is to start with the priciest item and work your way to the least costly one. You may notice that to balance this part of the budget, you’ll compromise on some finishes to make room for your must-have finishes. Here is what’s included:
These items aren’t part of your finished home but are necessary to construct it. They help to keep your construction moving forward and on schedule while providing some basic necessities on the job.
You may have noticed that this standard budget breakdown didn’t include a few items that you may need to consider for your new custom home. Make a plan with your architect to adjust your budget accordingly if these or other line items need to be included:
Whether you hire your architect or builder first, look to them for a recommendation on the other. Having professionals that have an established relationship will cut down on miscommunication and contrasting work styles. The earlier and more efficiently your architect and builder collaborate in your custom home design process the better.
Second, avoid change orders when you can. Change orders are a common part of the construction process, but you can minimize them by making your materials choices and sticking to them. This is why taking your time and communicating an incredible amount of detail to your architect during the design phase is so important. It will help your architect address every design concern from the very beginning, rather than mid-construction. Changing your mind about a material or design most likely results in increased costs, which could cause you to go over budget.
As you can see, the custom home-building process hinges on strategery, careful planning, and thoughtful choices. The architect and builder you choose will affect your experience, your budget, your timeline, and how much you’ll enjoy your home. The process is complex, but it doesn’t have to be stressful.
Southern Green Builders is a custom home builder that has created custom luxury homes in the Houston area alongside the best architects for 15 years. Our client’s experience is our top priority. That’s why we have honed our expertise to create beautiful spaces that stay within your budget and a carefully planned timeline. Contact Southern Green Builders to schedule a consultation and discuss your custom home vision.