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First Steps
What to do before you break ground
Building your dream home has its rewards, but keeping track of all the details can be disorienting. Just as you wouldn't try to build a house without blueprints, you shouldn't rush into a building project without first laying the groundwork. A good set of blueprints describes what you want and how you will get there. Taking the time to plan what you want in your new home and how you will achieve it can save you a case of builder's remorse a few years down the road.
If you've looked through the plans in our magazines or Web site, you probably have some ideas about your ideal home, but you may be unsure of the best way to make it a reality. Maybe you need help narrowing down the choices, or perhaps you just don't know where to start.
This section is a blueprint you can follow as you set your project in motion. Inside are tips and worksheets designed to help you find the right home for your needs (and your budget), deal with contractors and lenders, select a lot for your home and learn about the other details you will need to navigate through the building process without forgetting which way is up. | |
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First Steps, Part 2: Create a Wish List
Your dream home begins with a checklist
Some people believe in love at first sight. For them, finding the home they've always dreamed about is simple: They believe that they'll recognize the perfect home the moment they see it. Others prefer a more calculated approach. For them, we've created a system of tips and checklists that can be used as a guide for identifying the home that best fits the way you live.
When you shop at a grocery store, you likely prepare a list beforehand of the items you want to purchase. The reason for this is twofold:The list reminds you of exactly what you need so that you don't forget anything.The list keeps you focused on the necessities so that you don't waste time needlessly wandering the aisles. We recommend compiling a list and referring to it as you browse for home plans. You probably have a general idea of the features you want to include in your new home. Creating a list can help you refine your choices, so that as you begin searching, you're sure to focus on homes that meet your criteria.
Use your completed list as a bookmark to make sure you don't misplace it, and keep a pen or pencil handy so that you can jot down notes or even refine the list as you search. You may even want to create an electronic version that is available as you search through plans on-line at homestyles.com. Begin by filling in information about your current home, then create a parallel list of the features you desire in your dream home.
| | | Feature | Current Home | Dream Home |  | Style
(Country, Tudor, Victorian, etc.) | | | | Square footage | | | | Number of floors | | | | Number of bedrooms | | | | Number of baths | | | Foundation type
(slab, crawlspace, standard basement or walk-out) | | | |  | Shape
(walk-through, L-shaped, U-shaped) | | | | Island | | | | Breakfast/Snack bar | | | | Planning desk | | | | Walk-in pantry | | | |  | Formal living room | | | | Formal dining room | | | | Great room | | | | Hearth room | | | | Den or family room | | | | Recreation room | | | | Study/Library | | | | Home office | | | | Bonus room/Future space | | | | In-law or guest suite | | | | Media room | | | | Sun porch/Sun room | | | |  | Master suite with private bath | | |  | Whirlpool tub | | | | Shower stall | | | | Number of sinks | | | | Private toilet | | |  | Main-floor location | | | Access to outdoor area
(porch, deck, patio) | | | | Fireplace | | | | Walk-in closet(s) | | | | Sitting room or area | | | |  | Laundry room location
(basement, main floor, upper floor) | | | | Fireplace | | | | Woodstove | | | | Wet bar | | | | Outdoor kitchen | | | | Front porch | | | | Screened porch | | | | Patio | | | | Deck | | | | Other outdoor living area | | | |  | Garage | | | | Number of car stalls | | | | Attached | | | | Front-, side- or rear-entry | | | |
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First Steps, Part 3: Create a preliminary budget
Establish your home's financial foundation
In the process of selecting and building your dream home, you'll need to ask yourself a lot of questions. One of the biggest will be "How much home can I afford?" Unfortunately, the answer for many people is "Not as much as you think." Unless, that is, you plan ahead and are willing to trim your expenses in order to achieve your goal of homeownership.
Your bank or lending institution will likely be willing to extend you a loan equal to twice your annual income. But remember, banks are not charitable organizations. They're in business to turn a profit, and the way they do that is to loan you as much money as they think you can afford to repay. The more money they loan you, the more they make in interest payments. You certainly aren't obligated to take the full amount your bank is willing to lend. But how do you determine the amount you need without overextending yourself?
You create a budget. Your lender will calculate the size of your home loan based on your monthly credits and debits; i.e., your income and expenses. Most loan officers will ask you how much you bring in every month from sources such as your salary, Social Security payments, retirement benefits, disability benefits, interest income, investment income and other monthly income. Next, the lender will subtract the expenses you presently incur or that you may owe as a homeowner. Common expenses include estimated property taxes, homeowners and mortgage insurance, condo or homeowners' association fees, car payments, average credit card debt, student loan payments and alimony and/or child support payments. Your mortgage payment is then calculated on the amount that's left over.
As you can see, the expenses list isn't extensive. Your lender will likely ask you to come up with a dollar figure for "other monthly expenses." However, unless you're extremely cognizant of your spending habits, you'll likely underestimate that amount. That's why it's important to consider every aspect of your daily and monthly spending, so that you're not stuck having to make major lifestyle adjustments after you assume your mortgage.
Use a worksheet such as the one below to calculate your monthly expenses. Some of the expenses you list will be the same in your new home as in your current living situation. Other expenses, such as utility payments, taxes and insurance, will change. If you currently rent an apartment, they'll change drastically.
Ideally, the best way to get an accurate assessment of your monthly expenses is to track them. You can purchase an ordinary accountant's ledger at most discount stores. Use it to keep track of every single dime you spend for one month. It's not as hard as it sounds; it just takes a little discipline. You already have the statements for bills you pay every month, which account for a majority of your monthly expenses. For categories like entertainment, simply remember to keep your receipts for all transactions. Then, at the end of the day, sit down and tally them up.
Finally, don't assume that because you're buying a new home your upkeep expenses will be nil. Your brand-new home will contain brand-new appliances and a brand-new HVAC system, all of which may require scheduled maintenance checks to keep their warranties in effect. And your startup costs will also be large, from a down payment to landscaping to new home furnishings. Formulating a budget can help insure that you'll have money left over to make your new house a home. |
Expense |
Current Amount |
Projected Amount | | Groceries | | | | Clothing | | | | Heating | | | | Electric | | | | Water | | | | Trash collection | | | Phone
(including long-distance charges) | | | | Average credit/charge card payment | | | | Student loan | | | | Auto loan | | | | Parking or public transportation | | | | Auto insurance | | | | Auto maintenance, including gasoline | | | | Property taxes | | | | Homeowners or renters insurance | | | | Normal home maintenance | | | | Condo or homeowners' association fee | | | Doctor's visits
(includes dentists, chiropractors, optometrists, etc.) | | | | Prescription drugs | | | | Alimony or child-support payments | | | | Tithing and other charitable giving | | | | Cable/satellite television bill | | | | Internet access | | | | Cell phone | | | Entertainment
(movies, video rentals, dining out, etc.) | | | Activity costs
(health club memberships, hobby materials, etc.) | | | Contributions to an IRA
(or other non-employer-sponsored retirement account) | | | Savings
(it's a good idea to set a fixed amount, say, 5% of your
monthly take-home pay or as much as you can afford) | | | | Other monthly fees | | | | TOTAL | | |
|  | | Plan HDS-99-154
Photo by Mark Englund/Homeplans, part of Move |
Penny Pinchers
If the total figure for your monthly expenses seems a little daunting (and remember, at this point it doesn't include your mortgage payment), consider ways to lower it. Here are a few tips:
Limit the use of your debit card. Conducting transactions with cold, hard cash or even a good old-fashioned check will make you more aware of how much money you spend every day. Sure, debit cards are more convenient, and you can use them just about anywhere, but how often do you remember to record the receipts so that you're keeping track of how much you've spent?
Make a distinction between your needs and your wants and stick to it! Is your daily café latte a necessity? Before you answer, consider that one $2.50 latte per day every workday for 48 weeks (assuming the other four weeks of the year are vacation or other nonwork time) ends up costing you $600 per year. For some people, that ends up being a full mortgage payment.
Turn off the lights and turn down the heat. You heard your parents say it a hundred times, and the truth is they knew what they were talking about. Why pay for something you're not using? Your local utility company will be happy to provide you with an exact figure for the savings you can realize by lowering your thermostat one degree during the winter. In the summertime, you can often lower your bill if you allow the utility company to "cycle" your energy use, meaning that they turn your air conditioner off automatically during peak periods to control disruptions in service. Give them a call for more information. |
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First Steps, Part 4: Select your site
Find a home for your home
Just as important as choosing the home plan you want to build is choosing the lot upon which to build it. Which is of greater importance—the space or the place—is ultimately up to you. Some people have their hearts set on a particular design and search for a site to accommodate it. Others fall in love with a piece of ground, usually for its neighborhood location or its spectacular view or other natural amenities, and look for a house that complements it. What's most important is that you carefully scrutinize and research your lot before you buy it. Home plans can be modified. But, often, Mother Nature won't budge without the help of some very large, very expensive machinery.
Jim Zirkel of James Zirkel Home Design Services, Inc., based in Altamonte Springs, Fla., takes a holistic approach to the question of which to select first. "Instead of treating the floor plan and the home site as different elements," Zirkel says, "it is important to understand the relationship between the two and how they can work together to produce spectacular results." Zirkel, an award-winning designer with a national reputation, offers several suggestions for selecting your site.
"Many of the issues you need to consider when selecting a home site have little to do with the land and everything to do with lifestyle," Zirkel says.
If you have children, you may want to choose a site within a particularly desirable school district. If you can't stomach a long daily commute, choose a lot or a development close to your workplace. Consider the property taxes for different areas. Search for a location with proximity to amenities that enhance your daily or weekend life: parks, lakes and other recreation facilities, as well as cultural opportunities and shopping districts. Or perhaps you're looking for a quiet place in the country where you can get away from it all.
Are you the type of person who can live under the rules imposed by a homeowners association, or are you more of a free spirit? A large parcel of undeveloped, or unimproved, land can be attractive because it offers you almost unlimited freedom to build exactly the home you want and to maintain it in any way you see fit, within the boundaries of the law. However, unimproved lots are so named because they aren't ready to build on. The buyer—that's you—is usually responsible for paying for water and sewer access, as well as access to public utilities such as telephone service, gas lines and an electricity source. You'll likely even be expected to pay to connect your home to the nearest public street, an undertaking that can involve clearing the way for an access road and then paying to maintain it. And you'll probably have to shoulder the cost of preparing the land for construction, including tree removal and grading.
Alternatively, you can purchase a lot in a subdivision where the seller—usually a real estate developer—pays to prepare the lot for you. Improved lots usually cost more for this very reason. You may find the extra expense worth the trade-off; however, you may also be expected to give up an amount of control over the home site in return.
Many improved subdivisions are governed by homeowners' associations, also commonly referred to as planned unit developments, owners' associations, property owners' associations or community associations. The Virginia-based Community Associations Institute estimates that in large metropolitan areas, 50 percent of new-home buyers live in communities with homeowners' associations.
A homeowners' association features three common qualities: 1) All homeowners in the community are automatically members of the association; 2) the association's governing documents bind the owners to the association and its rules; and 3) the association levies mandatory fees against the owners for its operation. Some associations own the common property in a community, while the residents own their homes and properties. In other associations, the residents hold the titles to their homes and jointly own the common properties, like a clubhouse.
Many association-style communities offer amenities that individuals could not afford otherwise, like a swimming pool or tennis courts. And the association ensures the general upkeep of all the homes and lots in the neighborhood so property values stay consistent. (This is usually accomplished through the imposition of rules governing particulars such as acceptable styles and colors of houses, but the rules can be so far-reaching as to limit the number of pets and restrict street parking.) Make sure the benefits of belonging to a homeowners' association outweigh the control you give up before you purchase your lot.
Carefully research the history of any site before you buy. Call your county property records office, which keeps records about the land upon which your new home will sit. What was the land used for in the past? Who owned it? Was it a pasture, or is there a possibility that it was used for purposes that might be cause for concern, like refuse storage? Be sure to look into the future, too. Your local planning commission can provide details about the zoning in your new neighborhood. Is that idyllic nature preserve adjoining your lot scheduled to be leveled to make way for a new shopping mall? You'll want to know if the potential exists.
Consider your site's physical characteristics. Try to visit the site you're considering at different times of the day, to see how much light it receives. Does the lot slope in such a way that water drainage or pooling will be a problem? The way to find out is to visit following a heavy rain. Is the site above the 100-year flood plain? Will the trees you love so much need to be removed to make way for the house?
Enlist the services of a qualified real estate agent in your search, particularly if you're not familiar with the area in which you'd like to locate. An agent who specializes in land sales can save you valuable time in narrowing your search. Talk to the neighbors whose homes surround your potential lot and ask them what they like and don't like about the area. And be sure to have a lawyer look over any purchase agreement or contract before you sign it. |  | Plan LRK-93116 fits on a narrow lot, yet offers an amazing floor plan that delivers privacy and comfort.
Photo by Mark Englund/Homeplans, part of Move |
Is Narrow Nicer?
Bigger isn't always better. Is there any reason to intentionally purchase a narrow lot when you're searching for the perfect home site? Yes, says Mark Englund, managing partner of LifeStyle HomeDesign, based in St. Paul, Minnesota.
"Choosing a narrow design for a smaller lot can save on land costs," Englund says. "Those savings can then be funneled into design features that may have been cost-prohibitive on a wider, more expensive lot."
Traditional neighborhood developments, or TNDs, have proved wildly popular—and financially lucrative—in recent years, despite the fact that most place restrictions on the width of home sites. Many residents choose this type of community for the very reason that houses are placed closer together on smaller lots. This development pattern encourages neighbors to get to know one another, with resulting social and safety benefits.
Even if you're not the "neighborly" type, Englund says that a home set on a smaller lot is still a good investment:
"Many of today's home buyers look more for quality of space than quantity of space," he says. "They are willing to trade the width and size of their plan for wiser use of space, quality construction, energy efficiency and features like built-ins, home entertainment centers, relaxing master baths and state-of-the-art kitchens." |
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First Steps, Part 5: Choose your plan
Begin with your lifestyle needs
Finding the perfect plan may be time consuming, but it's key to the success of building a home. If you're not in love with the final product, even if it's only on paper, you won't be committed to seeing it through to reality. You may already have a picture in your mind of what your dream home looks like. It's important, however, to ask yourself a series of questions that can help you choose a plan that works for you. The answers will provide direction for finding the home you need, not just the home you want.
First, ask yourself a series of lifestyle questions. Are you single or married? Do you have small children or will you in the future? If so, will each child require a separate bedroom or will they share rooms? How many bathrooms are necessary to adequately fulfill the day-to-day needs of the family? Do you have parents who may be living with you in the future? Do out-of-town visitors often stay overnight? Do you frequently work at home? How often do you entertain? Do you require separate formal and casual spaces for different occasions? The answers to these questions may indicate the floor plan that best suits the way you live.
For example, answers to the first few questions help determine the number of bedrooms and baths you need, perhaps the most important element of a floor plan. If you have elderly parents or frequent overnight guests, you may want to consider a floor plan with a separate guest suite that includes a private bath or private access to a full bath.
Answering the question about how often you work at home can determine whether a plan with a designated home office, study or quiet computer alcove is a smart investment. Answers to questions about how you entertain can help you decide what types of common rooms you'll need. If you enjoy entertaining on a grand scale, you may want a set of formal rooms (formal living and dining rooms or a library, for instance) that provides the space and the proper atmosphere for such occasions.
If your entertaining habits are more casual, you may opt for a large family room adjoining an open kitchen instead. Many people today choose plans that feature a central Great Room, the character of which can change to suit your entertaining mood, from formal to casual.
Next, ask yourself what kinds of activities you enjoy. Are you an indoor or outdoor person? If you prefer spending time inside, choose a plan with features that enhance your leisure time: a fireplace, space for media equipment, a hobby room or a studio, or a gourmet kitchen. If you can't resist the call of the great outdoors, consider a plan with an open porch, a screened porch, a deck, a terrace or some other space that functions as an outdoor living room. Does the plan allow enough lawn area for children to use for outdoor games and sports? If gardening is your passion, consider the benefits of a plan featuring a mudroom near the utility room and a half-bath, for quick and easy cleanup. Or, choose a floor plan that offers multiple outdoor views overlooking the grand landscape or your handiwork in the garden.
Finally, the geographical features of your lot, if you've already purchased one, may determine the home best suited to it. A narrow lot usually calls for a design that rises up instead of spreading out. A wide, shallow lot, on the other hand, is perfect for a one-story rambler. A sloping lot offers you the chance to build a home with a daylight (walk-out) basement or an inconspicuous, tuck-under garage. For a scenic lot, you may want a design that offers outdoor spaces like decks or porches providing a panoramic view.
Keeping the above factors in mind will help you select the perfect lot for your new home. |
Your life, your home. Use this handy worksheet to get a handle on which home plan is the best for you | | Are you married? | __ Yes | __ No | | Do you have children? | __ Yes | __ No | How many? | | Other family members living with you? | __ Yes | __ No | How many? | | No. of bedrooms needed | | | No. of bathrooms needed | | | Frequent overnight visitors? | __ Yes | __ No | How many? | | Do you work at home? | __ Yes | __ No | | How many times per week do you entertain? | __ 2 or fewer | __ 3-4 | __ 5+ | | Do you need separate formal and casual spaces? | __ Yes | __ No | | | Where do you spend more leisure time? | __ Indoors | __ Outdoors | | Which hobbies or activities require special rooms or spaces? | | | Is your lot narrow, good for a two-story home? | __ Yes | __ No | | Is your lot shallow, good for a ranch-style home? | __ Yes | __ No | | Does your lot slope? | __ Yes | __ No | | Should your home be built to make the most of a particular view? | __ Yes | __ No |
| Save money before you start
How can you save money while you're pondering which home plan to buy? By paying close attention to the designs—both the exteriors and the floor plans. Keep your eyes peeled for these cash-gobbling elements:Unnecessary jogs and angles on the exterior will cost you money you might not be willing or able to spend. Complicated rooflines—intended to add "visual interest"—will also add to your bottom line. Homes that aren't saddled with the task of outdoing the Joneses will usually have simplified truss and framing systems, so they'll save you money from the start.If you love volume ceilings, look for two-story—or at least consistent—ceilings, rather than staggered heights throughout a floor. To create volume, specify truss systems that create tray ceilings, giving the effect of higher ceilings without requiring higher walls, which drive up your costs.Choose a floor plan that uses leftover space smartly. Common solutions to this problem are niches, alcoves and extra storage spaces like cabinets and closets.Straight-run stairs are easier and cheaper to build than double-backs (U-shaped) or curved stairs.Does the plan you're considering allow for plumbing runs to be shared; e.g., are bathrooms situated back-to-back? This will save you money up-front and in potential maintenance costs. |
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First Steps, Part 6: Modify your plan
Make a pre-drawn plan your own—for less
At last, you've found the home plan that best meets your family's needs. But are there a few changes you'd like make to the plan to make it truly your dream home? Would the kitchen better accommodate your love for baking or entertaining if it were just a bit bigger, or would the addition of a door between the master suite and the adjacent bedroom make it easier to use that bedroom as a nursery down the road? Perhaps your geographic location necessitates minor changes to conform to local codes.
Upwards of 75 percent of stock-plan buyers modify their plans in some way, estimates Jim Verhaest, director of sales of St. Paul-based Homeplans.com Design Services, a national modification company. "Mail-order plan services are intended as a very cost-effective way for consumers to find their dream homes," Verhaest explains. "But like snowflakes, no two dream homes are exactly alike."
Perhaps you've already created a list of changes you'd like made to your home plan. Hiring a designer to personalize your pre-designed plan allows you to capitalize on affordability with specialization, realizing the dream of a perfect new home in the process. For a smaller price than a custom-drawn home, modifications can tailor your stock home plan into a home that's as good as a custom home.
Verhaest says that modifications fall into one of three categories—regionalization, personalization or customization.
Regionalization brings a plan up to local codes. For example, the roof of a home designed in Florida might need to be made steeper if it's to be built in a state that receives significant snowfall. A home built in California, but designed in Georgia, probably needs to be modified to withstand earthquakes.
Common personalization requests made by Homeplans.com customers include rearranging room layouts and adding or subtracting square feet to a room. Customers often wish to rearrange a bedroom's layout, for example, to convert it to a study or a home office. Another popular personalization modification is to create a reading nook or a den by opening the master bedroom to an adjacent, unused bedroom.
"What we see," Verhaest notes, "is the push and pull, the adding and deleting of square footage." A customer can also customize a home design by adding fun details—a home theater, built-in cabinets on either side of a fireplace or decorative columns between two rooms.
Local design firms and companies that only modify existing plans can customize your stock blueprint for between $20 and $120 an hour. An average modification costs $800 to $1,500, according to Verhaest. Add that cost to that of the original blueprints and, in the end, a modified stock plan still costs thousands of dollars less than a comparable, custom-drawn plan.
Before hiring a design firm to modify your plan, it's helpful for you to experiment with design ideas, determine exactly what you'd like to change and be able to communicate these changes to both the designer and the builder constructing your home.
Homeplans.com offers products that allow you to take control of this process: pre-packaged home planning kits. Each kit provides you with the tools to plan out, relocate and change nonstructural interior and exterior details in your blueprint. The Customize-It Kit's drawing template, for instance, allows you to draw in door swings, bathroom fixtures, utilities and more. Commonly referred to as "redlines," nonstructural changes such as modifying a room size, relocating a kitchen or bath fixture or enhancing the home's exterior details can be accomplished with this kit. Homeplans.com's Interior Design and Landscape Kit includes a landscaping, interior design and home furnishings template to place and trace furniture, draw in cabinets and create your own landscaping plan. Both are available for purchase in the Customization Center.
Once you've thought out and put on paper your desired changes, you're ready to hire a professional to incorporate them into your final construction plans. Homeplans.com Design Services offers complete modification services for stock blueprints. "We've built an entire business around helping meet people's design needs," Verhaest explains, "with mail-order home plans as a starting point."
To modify a plan, Design Services or any other professional designer, architect or engineer requires the use of a reproducible blueprint to modify an original home design. Reproducible blueprints are drawn on "vellum" paper, which is very thin, almost transparent, and erasable. Once a detail is erased from the original design, a new or different detail can be redrawn in its place.
By authorizing the ability to change the original design of a plan, the designer is essentially relinquishing his copyright on a reproducible blueprint. For this reason, the price of a reproducible plan is higher. Without the copyright, up to 12 copies can be made of the newly created plan for the construction of a single home only. If needed, vellums can be flipped over before copying to create a mirror-reversed set if the homeowner wants the home built in the opposite orientation as the original.
A few simple modifications can make the difference between a home plan and your dream home. "Stock plans are designed for the mainstream, not for the needs of a particular family," Verhaest concludes."Modifying plans makes up for that."
To find a reputable designer to modify plans, check out the yellow pages and talk with friends and/or colleagues who have built homes recently. For references, call the American Institute of Architects, the American Institute of Building Design or the local chapter of the Home Builders' Association. You can reach Homeplans.com Design Services by calling toll-free (888) 266-3439. |
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First Steps, Part 7: Find a contractor
Look for a good fit
When you're building a new home, you can't just flip open a reference book, run your finger down the alphabetical listings and say, "That's the one. That's who's going to build my house."
Because you're not just looking for a builder. What you need is a new friend, a financial consultant, a guru, a business partner, an efficiency expert and maybe a soul mate—all wrapped up in one person. You need someone who knows the ins and outs of the housing business.
Since you will be asking so much of your builder, it's important to find one in whom you can put your confidence. Scrutinize your potential builders as closely as you would a business partner or a babysitter. Make sure not only that he or she is competent, but also that your personalities mesh.
Building a home can get intense. You and your builder will enter a relationship that demands large doses of patience and trust. He or she will have to understand your vision and your budget.
On the job, your builder oversees the construction of your home, setting deadlines and coordinating the arrival of materials and labor for every phase of building, from digging the footings to raising the roof. He'll be the project manager for an immense undertaking that's especially sensitive to weather, time and government regulation.
So have patience, expect some delays and, most of all, do your homework.
Build a list
Start looking for a builder early. Months before you begin moving dirt, you should launch an informal search for a general contractor. Make plenty of notes! Visit homebuilder.com to search for a list of qualified builders in your area or contact the National Association of Home Builders (NAHB). You can also ask questions of your local builders' association.
Get leads from friends and colleagues, especially people apt to give you straight stories about their experiences. Consult people involved in other aspects of home building, too. Loan officers at mortgage companies, real estate lawyers and appraisers, and others who regularly deal with the business of buying and selling houses can offer up names and opinions of builders in your area.
If you have an idea of where you want to build your new house, drive around the neighborhood and check out the homes that are going up. Ask new homeowners or people working on job sites who the major builders are in the area. Most builders specialize in certain neighborhoods. If you know where you want to build, there's no better way of doing research than to drive around and ask questions.
During the list-building process, find out not only which builders are popular, but also what problems have occurred with the not-so-popular builders. Once they get started, most people won't hesitate to go into the most minute details of their home-building experience. Smile, nod and when they talk about builders, take note.
Be exhaustive. In addition to noting their reputations, keep a log of which builders build what kind of houses, and in what price range. All of your notes will come in handy. And the work you do at this point will save you time and headaches in the future.
Pare down
When you've done a thorough search—you'll know you're ready when you start seeing the same names come up again and again—sit down with your notes. A few names will probably stick out—because they're the largest, most active builders in your area, or because the people you've talked to offered stellar recommendations.
Find a builder who constructs homes in styles, sizes and locations that correspond to what you plan to build. It doesn't make sense to hire a company who builds million-dollar mansions on the north side of town if you plan to put up a cozy, little south-side cottage.
When you're down to a short list of builders (three or four), set up a few tours. Ask the potential contractors if you can walk around a home they've recently built. Some contractors can put you in contact with clients willing to show off their houses. Since the builder won't give you the name of an unhappy customer, these tours should be more about looking than about listening. Inspect the quality of the floors, the corner finishes, the evenness of installed tile and the home's general craftsmanship. Even if you're an amateur at judging workmanship, you can still compare the work done on one house to the work done on another. If you feel comfortable doing so, take along someone who knows homes and can point out some details you might not have noticed.
Compare builders' warranties, too. It's common for builders to guarantee materials and workmanship for up to a year after a home is completed. If necessary, consult a lawyer to find out what you're entitled to after your home is built. If you ask, some contractors will even schedule in advance a couple of visits to a new home, to make sure everything is going smoothly.
Before you finalize your short list of builders, check a few more items. In most states, builders must register with a government regulatory agency (the particular agency may vary by state). Also, make sure your candidate is bonded, licensed and insured. Ask for their credentials. Call the Better Business Bureau, too, and find out if there have been any complaints filed against your potential builders.
Get bids
When you're down to three or four possibilities, solicit bids. Take your blueprints with you to see builders, and be sure to look at their portfolios. These people will be in sales-pitch mode, but try to discern how easy they'll be to work with. Do they give you straight answers? Your interaction should be comfortable and communicative.
Make sure each contractor works from the same set of blueprints, with the same list of finishing materials. If you want certain products used—faucets, windows, countertops—specify them when you solicit bids.
When the bids come in, don't just jump on the lowest one. You get what you pay for. Some builders try to come in low on the initial bid just to get the job—but they'll probably be forced to cut corners later. Look at the price as just one of many factors in choosing your builder. If you've done your homework, by the time you've narrowed the list to three or four candidates, all the parties should be highly qualified.
Ask questions and trust your instincts. If you had a good meeting with a builder, heard good things from his or her customers, and think that the bid's fair—then you've found yourself a builder. |
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First Steps, Part 8: Get financed
Find the right mortgage
Owning a home can be one of the most rewarding experiences of your financial life. Because it affords you the opportunity to build equity and hopefully turn a profit when you sell, homeownership is a great investment tool. It is also a major expense. Most new homeowners do not have the assets available to finance such an undertaking, requiring many to seek the help of a lending institution.
Choosing an institution to finance your new home won't be nearly as hard as choosing a builder. However, if it's your first home loan, you may feel lost in the maze of banking jargon you encounter. Don't worry. As with the rest of the home-building process, remember that others have made it through, and you will too.
The basics
Long before choosing a lender to work with, make sure your credit is in order; most experts suggest you do this at least six months before you apply for a loan. This means trimming down to one credit card, paying off as many debts as you can, and saving as much money as possible for a down payment. Lenders are wary of those who use credit like cash, so make sure you give them every reason to trust your money management skills.
To start looking for a lender, remind yourself of something your grade school teacher used to say: There are no stupid questions. No one expects you to be an expert at financing or building a home, especially if it's your first, so ask questions. Approach family members, friends and colleagues who have already gone through the process, and gather the names of lenders they recommend. Taking these steps may help you avoid costly mistakes.
Take notes. Write down the meanings of terms that are new to you, or that you want explained further at a later time. Many banks even offer handouts explaining the language of financing. If they don't, ask for one; the chances are good that loan officers have something they can photocopy from a resource book they themselves use.
The next step in financing your home is determining how much you can afford. The rule of thumb is that your mortgage should be no more than 2 to 2.5 times your annual salary. Another standard dictates that homeowners spend about 38 percent of their annual salaries (after taxes) on total housing costs—including mortgage, insurance and utilities. Remember to take into account your changing financial circumstances over the life of the loan (up to 30 years). Do you expect your income level to remain stable, increase or decrease? Do you have young children, or will your family expand in the future? Will education costs affect your family over the course of the loan? A good loan officer will review all these factors with you.
Find the right lender
Be smart when choosing a loan officer. If you don't feel comfortable with one from the start, move on. You have to feel that you can trust the person with whom you will share your private financial information. Also, shop around for a good deal. Create a worksheet comparing the options available from each lender you consider, and remember that not all offers are as good as they look. In particular, ask for and compare each one's Annual Percentage Rate (APR), which should include not only the interest rate on your mortgage, but also the costs associated with applying for and securing the loan you want.
For example, most lenders tack on several up-front costs for processing your application and running credit reports, in addition to closing costs that charge you points relating to your mortgage rate. (A point equals one percent of the amount borrowed. Lenders often charge points to increase the yield on a mortgage and to cover closing costs. In general, the higher the rate offered, the lower the number of points you'll be charged.) Even though one lender may offer a lower interest rate than the rest, the hidden additional costs may dramatically increase your overall mortgage payments in the long run.
The loan officer you choose will ask to see certain financial documents that indicate your net worth, as well as your ability to repay debts on time. This documentation, in addition to a loan application and a check for the application fee, are what lenders will use to begin the process of evaluating your appeal for a loan (see the Lender Checklist sidebar). Once the ball is rolling, you should keep abreast of your application's progress, as well as the weekly mortgage rates. Call your loan officer regularly to check in, ask questions and provide additional information, not to mention ensure that he or she is reviewing your application while the rates are low, so that you get the best deal possible.
Types of mortgages
It's likely that, once your application is approved, you'll end up with one of two conventional mortgages. Perhaps the most common in the past has been the 30-year fixed-rate mortgage (FRM), which carries the same interest rate and the same monthly payments throughout the life of the loan. Though equity builds more slowly under this type of mortgage, it can be a great investment when interest rates are low. FRMs are also available in 15-year terms. The 15-year mortgage carries a higher monthly rate, but the amount you pay in interest is lower over the life of the mortgage. This type of mortgage is ideal for middle-aged and older homeowners who are able to afford higher monthly payments.
An increasingly common type of home financing is the adjustable-rate mortgage (ARM), so called because the interest rate adjusts periodically throughout the life of the loan. Many lenders advertise ARM interest rates that are much lower than those for fixed-rate mortgages. Those rates often last for a short time and, after that initial period, the rates are adjusted on a regular basis. The time between rate changes—called the adjustment period—is usually one year. Three- and five-year adjustment periods are also available. This type of mortgage suits young or first-time home buyers who anticipate their income increasing in future years, as well as for those planning to move within four years.
An ARM allows you to take advantage of low initial rates. If interest rates drop over the life of the loan, you could also save money over an FRM. However, if interest rates rise, you could end up owing more than you would have under an FRM. Before assuming an ARM, evaluate how your finances will change in upcoming years. Can you afford monthly payments that could be higher than those you started with? A federally mandated cap on ARMs may help, but you should still work with your loan officer to find the type of mortgage that's of most benefit to you.
Another loan that is especially appealing to first-time buyers is the 5/25 or 7/23 mortgage. These mortgages allow you to take out a 30-year loan under a rate that is fixed for the first five or seven years. After that initial period, the rate is adjusted (usually to a higher rate) for the remaining 25 or 23 years. Some lenders offer the option of converting this remaining loan to an ARM. In either case, you'll spend less money up front, with the idea that you'll be able to afford higher payments in the future.
Government-insured loans provide a way for low- or middle-income families to secure a home loan for a lower-priced home. Federal Housing Administration (FHA) loans are not so much a loan as they are a guarantee from the government that you will pay less on your down payment and on your monthly payments than you would with a conventional loan. The drawback is that these loans have a lower credit limit on how much money you can borrow—around $150,000 in most areas. Veteran's Administration (VA) loans function in much the same way, but without requiring a down payment, and they are available only to borrowers with current or previous military service.
Finalizing your loan
Because interest rates fluctuate from week to week and even from day to day, the rate a lender quotes when you are shopping around could be very different from the rate available when you finalize. Those rates can also increase after you apply for the loan, but before finalization. A few percentage points can dramatically increase (or decrease) the total interest you pay over the life of the loan.
Many lenders offer a lock-in on a quoted interest rate and sometimes on the number of points quoted. The lock-in ensures that if interest rates increase before finalization, the borrower can still secure the loan at the terms previously discussed. Lenders often charge a fee for the lock-in, which lasts for a pre-determined time—usually between 30 and 60 days. If you choose to lock-in on a rate, do so immediately if the rates are rising, but stall as long as possible if the rates are dropping. This will help you get the best rate.
Of course, if you've got money to burn, you may not need to employ these mortgage tips! But if you're like most home buyers, the proper financing is absolutely essential to securing the home of your dreams. | Glossary of mortgage terms
Adjustable-rate mortgage (ARM): A mortgage in which the interest rate changes during the life of the loan; also referred to as an Adjustable Mortgage Loan or a Variable-Rate Mortgage.
Amortization: When monthly payments are large enough to pay the interest and also reduce the principal on a mortgage. Negative amortization occurs when monthly payments do not cover interest costs, so the balance due increases.
Annual percentage rate (APR): A measure of the cost of credit, expressed as a yearly rate, including interest, as well as other charges. This rate provides a good basis for comparing costs of loans.
Cap: A limit on how much the interest rate or the monthly payment can change, either at each adjustment or during the life of a mortgage.
Conversion clause: A provision in some ARMs that allows you to change the ARM to a fixed-rate loan at some point during the term, usually allowed at the end of the first adjustment period.
Equity: A buyer's initial and increasing ownership rights in a house as he/she pays off the mortgage. The buyer has 100 percent equity when the mortgage is paid in full.
Farmers Home Administration loan: A government loan available to citizens with limited incomes in rural communities.
Federal Housing Authority (FHA): Insures loans made by banks and other lenders; sets a maximum mortgage limit and usually requires a lower down payment than a traditional loan.
Fixed-rate mortgage (FRM): A mortgage in which the interest rate stays the same throughout the life of the loan; usually paid over 15- or 30-year terms.
Index: The measure of interest rates.
Loan-to-value—LTV: A percentage ratio that indicates how much of a mortgage remains due. (For example, if you make a down payment of 10 percent, and finance 90 percent of your mortgage, it is called a 90 percent LTV loan.)
Lock-in: A lender's promise to hold a certain interest rate and a certain number of points for the borrower, usually for a specific amount of time; also called a rate-lock or a rate commitment.
Margin: The number of percentage points the lender adds to the index rate to calculate the ARM interest rate at each adjustment.
Points: One percent of the principal amount of a mortgage; lenders often charge points to increase the yield on a mortgage and to cover loan closing costs. The home buyer, seller or both can assume this cost, usually due at closing.
Veterans Administration (VA): Insures loans made by lenders for eligible veterans and their spouses. Encourages lenders to write loans for people with lower incomes. |
| Loan checklist: What to show your lenderSocial security number(s)Purchase contract for the house or contractor bidsYour bank account numbers and branch addressesRecent (past 2—3 months) bank and securities (CDs, IRAs, stocks, bonds, etc.) statementsRecent (past 2—3 months) paycheck stubs showing year-to-date earningsYour employer information and W-2 forms (If self employed, bring business tax returns and balance sheets from the past 2—3 years.)Any and all information about monthly debts, including loans and credit cardsAddresses of previous residences and landlords from the past 2—3 yearsInformation about real estate you currently own, including the market valueMortgage or rental payment receipts(If applying for a VA loan) a Certificate of Eligibility from the Veterans Administration
Sources: homeplans.com, "Realize Your Dreams," "Step by Step Guide to Building Your Home"; Firstar.com; Fannie Mae, Inc.; idiotsguides.com; The Complete Idiot's Guide to Managing Your Money, Robert K. Heady and Christy Heady. |
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First Steps, Part 9: The legal pieces
Know your rights
As you prepare to spend tens—even hundreds—of thousands of dollars on your new home, the two things you need most are an attorney and a building contract.
The "do-it-yourself" approach is not wise for most new home builders. Building contracts are full of clauses that need to be worded precisely so as to avoid future confusion and liability on the part of either party. What you think is "precise" may well contain a loophole that could be exploited—often in a way that is not in your favor. Unless you are an attorney yourself, don't try to save money by handling the legal issues. Get a pro and rest easy.
Your building contract is crucial. All of your concerns, needs, specifications, assets and more must be put in writing and signed off by you and your contractor. If your contractor offers a "standard contract" and adopts a "take it or leave it" attitude, walk away. Your goal is to negotiate terms that you can live with, without alienating a good, honest contractor in the process. With that in mind, work toward a contract that includes, but is not limited to, the following:
Scope of work
Who will clear the site? Who will obtain the needed permits? Which spaces in the house will remain unfinished? These and other questions should be answered. Be specific.
Change orders and delays
Create a change order policy at the outset. Define which delays are acceptable (inclement weather, manufacturer delay, etc.) and which are not (contractor decision based on his other projects).
Allowances and payment schedule
Have your contractor include a detailed list of products and services that his estimate does not include. Calculate a payment schedule that is flexible and yet gives you some control over the process and final product.
Specifications
Include a detailed list of the products and services that your contractor should provide in the construction of your home.
Default clause
If you or your contractor breach the contract, a clause should be found in your contract that explains exactly what action is to be taken to deal with the breach.
Editor's note: This legal information is not intended to be your final source. Consult with a local attorney as your primary source of legal information for your state. | Trouble coming
Even with the best intentions on the part of the homeowner and the builder, a construction project can go awry and the relationship can sour. If this happens to you, don't panic. Consider third-party arbitration.
An arbitrator can help to settle disputes when both parties are digging in their heels. For this reason, it's a good idea to include an arbitration clause in your contract. Contact the American Arbitrators Association and the National Academy of Conciliators and find out their fees before you include either of them by name in your contract. Or, you could name a different third party—say, a local attorney who isn't representing either of you—to settle any unforeseen disputes.
If you're nervous about the added cost, remember that arbitration fees are a drop in the bucket compared to litigation costs.
Your builder might have an arbitration clause in the contract he asks you to sign. This will protect his reputation by keeping all disputes off of the public's radar. Keep in mind, though, that the possibility of negative publicity might be your only leverage to resolve a future problem. If you find an arbitration clause on your builder's contract, you would be wise to discuss its inclusion with your attorney. |
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