Preparing the Budget for Building a Home

One of the most important events in your life is to build your home. The first step in planning the construction of a new home is the construction budget. Creating a budget for a building project requires an understanding of all the elements involved and where you might experience budget blowouts.

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In fact, what is a construction budget?

The construction budget is the dollar equivalent for all the materials and work required to design and build your new home. However, a financial budget begins like a rough-and-ready assessment of your overall plan and gradually becomes more accurate as cost details are fed involved with it.

Before you can build a new home, you must determine a home building budget. Your budget equals your cash plus the money you can borrow on a home mortgage loan or home construction loan. In other words, determine what cash you can or are willing to put into your home and how much you can afford in monthly payments to cover whatever money you need to borrow.

However, figuring out how big house you can afford isn’t difficult. Lenders and real estate agents do it every day. A “lender” may be a bank, a savings and loan, an insurance company, a credit union, a relative, or some other source.  Lenders use qualifying formulas to determine how much you can afford to pay each month. The formulas will vary from bank to bank but generally they compare your income to your debt payments.

Another typical guideline is that the total monthly house payment should not exceed 25% of your stable monthly income.

The monthly house payment used in these qualifying formulas consists of four items:

1. Principal – A portion of the monthly house payment will go towards reducing the principal (the amount of money originally borrowed).
2. Interest
3. Taxes – You have to pay property taxes.
4. Insurance – Most lenders will require you to carry a home insurance policy to guarantee that funds will be available to repair accidental damage to the home.

Build Your Own House – Cost Estimating

How much does it cost to build a house?

Let’s see some tips to help guide you when discussing your finances with financial professionals, the architect, and the builders.

1. Budget per square meter (or square foot). Ask your architect or general contractor for a breakdown of costs per square meter (square foot) for:

  • A finished building (interior as well as exterior)
  • Or an incomplete interior (where you can save a lot of money if you do the internal work yourself)

However, these costs per square foot do not include a home builder’s, or General Contractor’s, Profit & Overhead, or land. The cost of land varies tremendously, depending on location.

2. Allow 5 to 10 percent of the construction costs to cover design fees. This amount will vary depending on whether your architect only draws up the plans for you or also project-manages the construction.

3. Get in a quantity surveyor. It is wise to do this as early as possible, as a quantity surveyor will be best placed to give you an accurate overview of the costs involved in the entire building project. This independent advice will be important, as your architect will often have ideas that don’t fit within budget.

However, all builders must constantly balance the material, labor, land & overhead costs when estimating the cost of building a new home. This is what cost estimating is all about.

So, if you absolutely must have a certain expensive material item or subcontractor, you have to compromise and spend less on something else in order to stay within your budget. All this compromising and cost balancing is done in the planning stage of construction.

4. On the other hand if you are your own General Contractor, you’re in charge:

  • Try to keep costs as low as you can.
  • You must use a “spreadsheet” to track category costs. This spreadsheet will make this job easier, and cost estimate will be more accurate.
  • Cost Estimating is the #1 job for a General Contractor, it is his critical job.

5. Budget for landscaping as well as building. If you plan on fixing up exterior spaces and the garden as part of the build, these costs will also need to be taken into account.

6. Permits, fees, surveys (1.5%). Your building inspection department can give you the cost of permits and fees, which vary by locale.

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