Currently, most banks usually will only loan 80% of the "appraised" value of the house, not the cost to build. So, if you are building a house that will cost $400,000. And the finished house is appraised at say $360,000. you would need 20% of the $360,000 plus the difference between the actual cost to build and the appraised value which is $40,000. So, $40,000 plus the 20% of the appraised value, which is $72,000, means you would need $112,000. All of this is dependent upon your ability to make the monthly payments. They consider income, assets, liabilities, credit scores etc. I am using the approximate cost of your size home and cost per sq ft..

For us it made more sense to buy existing until we could save up the entire amount but we are not typical so ymmv.

You could sell your home and rent. You then have the money to build based on zorro'a figures

Zorros' post mirrors what we found on our built, almost to the penny. The only other thing I could add is that I'd also recommend a healthy contingency fund too. Stuff happens. And whatever it is, it almost always costs more money.

Thanks, Zorro, and everyone else. Mathematically, I figured on that, but wasn't sure how much extra should be saved for contingencies as patriceny mentioned.

20% is the generally accepted contingency fund amount.

So using the numbers above, we're looking at almost $192K ready to roll? I suppose this is why many don't build until they're much older...or very rich :) Good to know.

The good news is we have time on our side. We can start upping the savings now that most of the student loans are paid off.

Time is not always on your side. It all depends on whether your increased savings rate compensates for inflation in materials and construction. There's nothing worse than saving for years and finding out that you can buy less home at that future point than if you had acted today.

Of course, and that's a good point. However, you can't spend money you don't have. Sometimes waiting is your only option.

The only thing I would add...when we were young and built our first home we sold our home and rented while building. Two mortgages was too scary of a proposition.

I might take that chance now, but not when we were younger.

It sounds like the two of you are doing a better job than many young couples in planning financially.

Good luck!

How much contingency you need depends on how much you want to decide before you build, and how likely you are to see unexpected problems to come up.

For us, building on very flat land, doing a geotech study, we don't anticipate much by way of challenges regarding the basement. For the above-grade portion of the house, we've picked all finishes, fixtures, lights, flooring etc, so there is very little if anything that we will need an allowance for. So unless a whole bunch of stuff gets discontinued and we cant find a similar look for a similar price, we dont expect any overages there.

We designed our home ourselves, but are having it reviewed by an architectural technologist in the industry, so we are comfortable that there shouldn't be surprises code-wise during our build.

So we currently have a contingency of less than 20% - I do feel good planning negates the need for such a large variance in cost.

I'm assuming you have the $40k saved just for the house and you have other savings including retirement savings?

Correct. I have a pension, TSA, 401k, and an IRA.

Smart! very smart. Frankly if housing prices are good where you are now, and you can get a rental for less than it costs to own, I like the idea of selling your place, and using the money to add to your downpayment and then saving while living in the rental.

We are thinking of doing just that too. Renting for a year or two while we build. Selling our condo.

We are doing that now... Sold our home in Aug 2014, bought land a month later. Living in a small rental while we sort out house plans, builder and finances. Hoping to break ground in late Fall 2015 and move in next summer. Made sense for us to take the equity from our home to buy the land and take some time to sort out the other issues with doing a custom build.

Thanks. My only concern with renting is that it's money you won't get back nor is it contributing to current equity.

You sound like you are being really smart about this.

I totally understand your concerns about renting. I struggled with the pros/cons of the exact same thing. If you sell the house and rent something, you get your equity in cash, which comes in really handy during a new build. But you are then moving twice, which is a real pain. But you avoid the very real possibility that you could end up owning 2 houses at the same time, with dual mortgage payments.

I despised the idea of moving from my house, into a rental, into the new house. But I despised the idea of owning 2 houses too. I figured just my luck, we'd have another huge financial crash just after I started construction on my new house. So I had visions of watching all my equity in the current house go down the tubes, being unable to sell it for its current value, and then making 2 mortgage payments forever. So I bit the bullet and did a short term rental. It helped me sleep easier at night. The amount of money flowing out of your pockets during building a new house is staggering. I wrote checks for amounts so large it took me a minute to remember how to correctly draft the check! ;) But everyone has different tolerances for risk and will value things different as well.

If you are not in a hurry to build it will give you plenty of time to accumulate more down payment. I would have the 20% (of appraised value) plus an a additional 10% for all the extras or unexpected expenses.

We are planning to sell our house and use the money to pay for the next house. We have money in the bank but would rather not spend too much of that if possible. Don't know if we are going to take a loan or pay cash. However, after talking to an architect last week he said to figure on 140/square foot which is extremely high in the area we are going to build. You can buy a 2,000 sq. foot house in the same area for around 200,000. I know it is cheaper to buy than build but I thought the square foot price would be closer.

Mini Soda

I agree with your comment. It is difficult to put that much money into a build. We are struggling with that scenario too.

Well, provided there *are* earnings over the period and that's not guaranteed. Even junk bond funds today are only yielding 4% so your arbitrage is rather thin gruel unless you go even further out on the risk spectrum.

If you are working and bringing in new money every month it is probably less of a risk for you because you can always make it up with wages if things go south. Not so much if you are retired and dependent on those same earnings for your living expenses as well as to pay off the house.

100% plus contingency.

But that's not a completely truthful answer. How we got to this point: We live in a medium-sized city because it's the school system we want our kids to attend. It's also close to our jobs and most of the services we use on a regular basis ... and we kind of "fell into" a large house in exactly the right area ... though I don't love the house itself. We paid cash for this house when we purchased it 14 years ago, and we could not find another spot as ideal for our kids or as cheap.

But it's not where we want to retire. We want to retire one county over to a spot that's less expensive to live, more country, and better suited to retirement. We haven't wanted to make that move until our youngest finishes high school (and we're three weeks away from that point now), so we stayed in our super-cheap, ideally located house ... and saved.

If we had been staying in the same area, we probably would've built when we had roughly 50% of the expected building cost. However, because building is more expensive than buying an existing house, we would not have started a building project if we hadn't had 50% of the expected cost.We have always been rather conservative with our money, and we're building a house that's below our means. We are building a house that'll cost approximately our current house + 50K. So once we sell this house, it'll only be about 50K out of our pocket.

Smart. If we could outlay 100% in cash, that would be awesome. We would also be living in too small of a house for 15 more years trying to save that money. Another concern is with interest rates. They're only going to go up, and in fact, many believe that rates will hit upper 4% by year's end. That definitely factors in. Albeit, having more cash down can offset the interest rate considerably. I just hope it doesn't hit 5.5-6.5% anytime soon.

Great thread! We bought our first home in 1980. Any others my age remember this? Look at the interest rates. Scary huh? Like buying a home with a credit card.

Yes, I remember that! My mortgage rate in 1983 was 12% and that was considered normal at the time.

Eh, YMMV is definitely the ticket. We are building in the upper 600K range. We are doing it with 20% down on a FIXED PRICE construction loan. The payment is high, but we live in a HCOLA and the salaries match so it's not as big a concern. We are also a two-income household, and have kids in school so daycare isn't twice my mortgage payment anymore.

The bank we found would also finance a construction loan with EXCELLENT credit and reserves of 10% for a 10% down-payment. Granted, the rate on this was .25 higher, but the cost of cash is exceedingly more expensive if you don't have it and need to wait several years to save and interest rates go up in the meantime anyway.

My only advice is to have a true emergency fund of 6-8 months income in the bank that you WILL NOT touch for the build.

mgh_pa, I'm going to disagree: Your only choice isn't to remain in a too-small house. You always have the option to move to an already-existing house, which is less expensive than building.

And, yes, Cricket, when we were married in 1990 we bought a starter house with a 10% interest rate on the mortgage and counted ourselves fortunate.

Why would you not just buy an existing home like MrsPete suggested?

We want to live on acreage. It's nearly impossible to come by here and when you do find it, it's worth a ton. We were able to secure a significant amount with the help of my father. It's not sold yet, but it's under contract as a first option to purchase (signed contract verfied by the attorney).

Not to mention most homes around here are either overpriced, or designed/layed out by old money. My wife and I prefer a modern rustic appearance (hence the desire for a Crafstman style home), and there aren't any of those around here.

This has been a helpful post for me. We are working on being debt free before we build and having ample cash to make it through the project. I just didn't realize what "ample" cash would be. I think we could still build within a couple of years, I just now know that I can't take my foot off the gas once my debt is completely gone. This hasn't deterred me though. I can't see buying another house that is meh, just to buy a house. We are in our mid-forties and want this to be our retirement home in the mountains. If I have to delay the build to pile up more cash, then so be it. Thanks for the post!

well mgh as a craftsman house lover myself I can understand. However do realize that to build usually costs more than to buy.

What's that saying? It's been kicked around here often enough. Perfection is the enemy of good.

We all have our idea of what would be perfect, whether it's the ideal neighborhood or a place in the country, a trendy city loft or a sprawling ranch, etc., etc., etc. But we can't always have those things as soon as we'd like. Is it worthwhile to wait to have THE HOUSE? Or is it better to buy something and have the space you need, knowing all the while you'll eventually move out of that house? Or is it better to stay in your cramped house 'til you have a good downpayment? The details and answers vary.

I'm thinking of a friend whom I met 25 years ago when we worked together. She lived in an apartment (just her and her husband, he had one child from a previous relationship who was with them part-time), so space wasn't an issue), but she desperately wanted to build a house of her own. But for all her protestations about how much she hated apartment living, she was 100% unwilling to settle: She didn't want a big house, but it had to contain numerous luxury items -- certain finishes, oversized garage, massive walk-in closets, and of course a pool. She was living in a fancy apartment, and she thought it would be "moving down" to move into a place without a pool, etc. When my husband and I bought our little starter ranch house, she declared it nice enough, if you're willing to settle for no garage and small spaces.

Fast forward to today, she's still living in a rented apartment and has NONE of the things she claimed she wanted so badly. At one point she even had an inheritance that would've been enough for a good downpayment on a modestly priced house, but it wasn't enough for the house she really wanted ... so she didn't make a move, and over the next couple years she squandered that money and now is back to zero on her house fund.

The money part of the house isn't easy.

Good points all. Duly noted. We're happy where we're at now. We're expecting our first child in November. Once #2 comes (IF :) ), it will be time to start thinking about getting out of here due to space.

MrsPete, it reminds me of the couple ex and I bought our raising the kids house from. they had plenty of money. He was the ear, nose and throat doctor everyone went to in the area. his reputation was stellar. the house we bought from them was large (3200 sq feet plus basement, attic and detached 2 car garage on 1/2 acre). the house was built in 1898 and we bought it from them in 1993. they had lived there for 30 years.

When we bought the house we asked the wife what was under the threadbare gray carpet. Her answer was she didn't know as the carpet had been there when they moved in. the thermostat was from the 50's, the electrical still had some knob and tube, and this family of five lived in only 1/2 the house because the Doctor had his office in the other half.

Additionally, they had one full bathroom for the whole family and one 1/2 bath which was off the kitchen. And yes the stove was an original from the 40's only not one of the better brands such as a chambers. the cabinets were original from the early 50's but had been refaced with wood look formica.

they were at the time in their early 60's and they had bought a home in FL and planned to finally do lots of travel. they never got the chance. the wife died of cancer less than 2 years later.

How much happier would they have been if they had made the house they lived in something more to their liking even if it wasn't a dream house, or if they had moved earlier into a house the wife would have preferred? (the wife admitted she never loved the house but they preferred to wait to get their dream when he retired).

there is no such thing as the perfect house or the perfect area, etc. Even the "dream" house I am going to be building is not perfect because with everything there are limitations; budget, site, zoning, etc.

Am I looking at this wrong? I reached out to a local bank today about construction loans & downpayment requirements. This is the response I got. I replied asking if that really meant only 5% down required. Am I missing something? I'm not saying whether or not that's what you should do, but what is required.

Maybe these are the terms for only the construction loan. When you apply for a mortgage loan you might need a higher down payment. I would ask them about it.

There is usually an addendum on this that was discussed in another thread. Many banks will loan a large part of the acquisition costs up to 80% of the appraised value. Essentially, this works out well if you can build some equity into the house as you build. The bank that I very recently moved to is 90% of the build cost + land value up to 80% of the appraised value.

As to the original post, with interest rates where they are I would say sooner rather than later is not a bad idea.

Here is the response I received from the bank. I'm not sure if the small downpayment is because it's a local bank and my area does a lot of new builds. I'm originally from MI and they won't even lend for land, but in Asheville, NC it's very common.

Hi Darby.....I'm also in NC and currently looking at banks for a construction loan. Would you share the name of this bank with me so I can see if they're in our area?

Thanks!

Absolutely, it's Asheville Savings Bank. Patrick Blackburn is who I was communicating with. I probably should change my login on here. Darby was one of my dogs. My name is actually Kristen :) I'm still finding it hard to believe that is actually true. I want to put as much down as I can but this would really help to not delay the project too long. I could also save up more contingency money. It would just be nice to know that you've got some cusion for the unforeseen.

Thanks for the info! I'm in the Piedmont and it doesn't look like any of those banks come this far east. Good luck!

asyrp43...I would check with local banks. ASB just verified that they also base construction and permanant financing on land value plus cost to build at start of construction versus appraised value at completion of build. Based on comments here I was very surprised to hear that. I sent a few emails back and forth to make sure I wasn't misunderstanding. Now I have to weigh how much money I want to put down and weigh waiting longer/putting more down or putting less down and being able to start build sooner.

For what it is worth, and it is worth exactly what you are paying for it, I would build sooner rather than later. Right now interest rates are just so low, most people think they have to come up soon. Right now according to what I can find, Asheville Savings Bank is charging about $4.70 per thousand financed. So a $320,000 loan will run you about $1,504; a 1% increase (which many say a 2% increase is inevitable) will run run you $5.29 per thousand or $1,693. While that might not seem a whole lot of difference, it really is. In fact, it is a 12.5% increase in payment. A 2% rate jump takes you up to $5.92/$1,000 or $1,894 per month. My advice would be sooner rather than later.

However, before you go act on this advice, I am personally of the minority opinion that rates will stay low a while longer. The EU has to raise their rates with the U.S. or we can't do it and right now the E.U. essentially has negative interest rates. Again, this is my opinion, many people think the increases will happen sooner.

Good discussion. All things to consider, for sure. The interest rates definitely weigh heavily, but the land acquisition has to happen on the current owner's timeframe. We can't buy until they're ready to sell, so unfortunately we're at the mercy of their time schedule.