The overall custom home budget is subject to various changes during the building process, usually growing rather than shrinking. Budgeting at the beginning of the custom home process involves balancing out the cost of the house with what you can afford. However, the house may require more money than you have, which you can’t figure out until you design the house and so on. The best method is to evaluate the two issues separately and then work to a compromise.
If you’re financing this project through a lender, then the lender’s budget takes precedence over yours, so you need to get the two in line as soon as possible. The lender will heavily influence your budget by determining an amount to lend you.
Custom Home Budget Key Issues
The best way to create a custom home budget you can live with is to work with your certified public accountant (CPA), financial adviser, and loan officer to assess how all factors will impact your finances. There are some key issues that need to be discussed and taken into account, such as:
- Cash on hand
- Capital gains issues
- Current tax bracket
- Diversification of assets
- Intended length of time owning the home
- Long-term investment strategy
- Property appreciation
- Tax deductions for interest and points.
Thereafter, you need to arrive at a comfortable payment that a loan officer or loan calculator can translate into a loan amount. You also need to speak to a loan officer that is a qualified construction loan specialist to be assured you meet construction loan qualification. After you have a loan amount, you need to account for the cash available. Cash is your surest way of keeping a custom home project running smoothly. Don’t forget to include money you can take out of your existing house through a credit line or refinance. After you have decided how much of your cash you want to spend without being reimbursed by the construction loan on your project, add it to your loan amount estimate for the total estimate of your custom home budget.
A good way to manage your budget is to use the “dollars per square foot” technique. Since there is no specific widely accepted definition for this, you have to define dollars and square foot the same way for each person you work with. Then you can make sure everyone is on the same page in every relevant conversation.
Square footage for this purpose needs to include all living space enclosed by walls that is completely finished. Your definition of square footage needs to include the square footage
for the following:
- Bathrooms
- Bedrooms/closets
- Den
- Dining room
- Family and great room
- Fully finished basement
- Guesthouse
- Hallways and entryways
- Home theater and/or game room
- Kitchen/laundry room/pantry.
Now that you have a total square footage number, you need to define the dollars necessary in the budget to define dollars per square foot. Include here labor and construction materials costs for all the living space mentioned above. You don’t want to include all the construction costs in this dollar amount; many costs need to be evaluated independently, such as:
- Financing
- Hardscaping (unattached decks, pools, fences, and so on)
- Land
- Landscaping
- Soft costs (permits, plans, and fees).
Here is an example of how a preliminary custom home budget sheet should look like:
Funds available
Add your available cash and the loan amount for your total custom home budget.
Cash $175,000
Loan amount $650,000
Total budget $825,000
Cost-to-build
Add all your costs together for your total cost.
Land $200,000
Soft costs (permits $40,000
plans and fees)
Hard costs $424,000
($160 per 2,650 Sq. Ft.)
Financing $35,000
Landscaping $40,000
Hardscaping $25,000
Total Cost $764,000
Remember that it’s very important to always keep an eye on the custom home budget, since any miscalculation can prove to be a disaster in the process.