The first step in creating a new home building budget is to consider your resources, your goals and your priorities. It is crucial to consider everything you have, not just your money, but also your skills, creativity and spirit of adventure. It is also important to assess your real goals and priorities. For some, moving into a certain gated community is their ultimate goal, and they are willing to do anything for that goal. For others though, there are other ways.
Your financial resources determine how much money you have to spend, but may not determine how nice your home will be. In considering resources, skills, the ability to learn skills and creativity should also be considered. Many people save money by doing some of the work themselves. Also by using your thinking skills and creativity you can find ways to save on homebuilding. If you can think outside the box, you can save thousands on construction costs.
It is discouraging to read about how much it costs to build a home. We often forget that the average income in our country is around $40,000 a year, yet at least some totally average people have nice homes. Even people who have substantially lower incomes have been able to build nice homes. Those who make more will find it much easier of course, but the key is in knowing how much you have to spend and how much your skills will have to compensate.
To determine how much you can borrow, simply calculate 1/3 of your monthly income. This is your maximum monthly payment. Use a mortgage calculator, adjust it to a 15 year mortgage, and make your calculations from that. Most people use 30 year mortgages, but they end up paying nearly double for their homes. A 15 year mortgage is much more sensible and has lower interest rates, unless you just want to give a lending institution an extra 100K. You may find it easier at a lower income to pay only 25% of your income in payments. Calculate this amount as follows to see how much you should borrow.
Here is an Example
If you make $40,000 a year, one quarter of that is $833 per month. One third of that is $1,100. A monthly payment should be somewhere on the spectrum between these two numbers, but think logically to see what these numbers would mean in your budget. You may want to go with a lower monthly payment. In fact one can borrow 100,000 for $690 per month and that sounds very doable. This will not over extend the family budget and in fact it may be less than rent. Together with a required 30% minimum down payment of $43,000, that is $143,000 to spend on your home.
You could be wondering where on earth you are going to come up with $43,000, which, by the way, has to be your money and not a gift from family. I recommend making practice payments to a savings account, while you clean up your credit and plan your home, for about one year before committing to buying a home. If you can make practice payments of up to one third of your income, you can accumulate $13,000 in one year. One third is difficult but something most people agree to, without trying it out first. If saving this much proves impossible, then lower the amount but keep trying until you find the amount you can pay each month. Making practice payments is the best way to determine your maximum payment. It is much more accurate than a percentage. Remember to add any rent you are making or other expenses that would not be applicable if you were living in your home, to your maximum payment.
If you own your lot free and clear already, then the value of the lot also counts as a down payment. You could also cash in your 401 K, add up other savings, or sell your possessions. If you still don’t have enough, you may qualify for an FHA mortgage which would allow for a smaller down payment. VA loans require no down payment at all. Even if you do not have enough, talk to some home builders and loan officers at the end of one year. You may be able to qualify for some type of program with a lower down payment.
If money is still a problem, consider buying a kit, building with used shipping containers, or having a home builder or contractor construct a small shell for you. Most kits and shells cost about $25 per square foot. For more information on kits and shells download our 98 page free book, and read the other articles on this site.
You can complete the shell at your own rate. Consider that you will absolutely have to hire an electrician, to do the wiring and may require the services of a plumber as well. The rest is simply a matter of hard work and buying materials as you can afford them. Insulation is a must because this will save you money form now on, and make your payments a lot easier to make.
Shop salvaged building materials stores, flea markets, discount stores and carpet remnant dealers to get a better grade of materials and tools at a low price. Shopping around for materials can save a lot of money. Be creative and use your artistic skills to make your home uniquely your own. Enlist your friends to help you bargain shop. By considering each purchase you will save money over contractor prices, and have a home based on your own tastes.
There are many ways of building a home. This site is devoted to helping prospective home owners find ways to make their home ownership dreams a reality, regardless of their income or tastes. Thinking creatively can always help you save money, as well as helping you create a home that is uniquely yours. There are many different ways to create a home building budget, and build a great home without wasting money on interest, future energy bills, or excessive materials costs.
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