As we've said before, there are two primary parts to figuring out your budget for a custom home. First, think about a number, whether that's the overall amount or the monthly payment, and see if that number scares you. Second, figure out how much you can borrow from the bank for your custom home.
The Truth About Budgeting for Your New Home
Why bother with the first part? Simple. It's a matter of mental and emotional preparation. Yes, the second part is important also, because unless you've saved up a six-figure cash amount to pay for your home, you're going to have to borrow money from a bank to build your home.
So, let's talk about how you figure out what you're comfortable investing. Notice I used the word "investing" and not "spending." It's not just a sales tactic. Why did I use that word? Because you expect to get something way more valuable in return for your money. You're going to vastly improve your lifestyle.
Maybe you're creating a place for your family to grow and thrive. Maybe you're providing a lifestyle for you and your spouse in your retirement years—the lifestyle you've worked hard all your life to have. Those things are why you have money in the first place, so you're investing with the expectation of a once-in-a-lifetime return. So, yeah, you're not just "spending" money here.
What You Feel Comfortable Investing
Think of the highest number that scares you… does $250,000 do it? How about $300,000? $350,000? The first number that scares you is probably your "stretch" number, which is the number you would invest to get 100% of everything on your dream list.
But you might drop to your highest comfortable number to get 90% of your list. If you prefer to think in terms of monthly payment, do the same exercise for that number.
What You're "Qualified" to Borrow from the Bank
Now you need to figure out how much you can borrow. In banker terms, that's how much you're "qualified" to borrow. For many people, this is a nerve-racking experience, because really, who likes to be judged on how much money they "qualify" to borrow?
Here's my mental defense for that feeling: Banks make money by loaning it out to people. That's how it works. The banker or loan officer you're going to talk to is really a "loan salesman." He needs to sell loans, because that's how he makes a living.
That whole charade of seeing if you're "qualified" is just to make you feel like the bank is the one in control. It isn't. You are.
Home Builder First. Bank Second.
I've written several articles about how to find the right bank. To summarize, my recommendation is to find the builder you trust, and then interview the one to three bankers he or she recommends. There's a relationship there, and it is built on a track record of doing business together.
The last thing you want to do is find out when the banker messes up your loan that they don't have much experience with custom home loans. Trust me, it happens all the time.
In terms of the overall process, you really need to figure out your budget before you go down the path of finding or designing the perfect house plan. Avoid the mistake I see people make all the time where they find or create their dream house plan, spend lots of time and energy on it, fall in love with it, and find out it's way over their budget.
Then, they compound that mistake by shopping around until they find a builder who will tell them what they want to hear, sucker them into a contract, take all their money, and leave them either with an unfinished house or a finished house they can't afford to keep.
Just like goofed up construction loans, this happens all the time. Figure out your budget first so it doesn't happen to you.