When planning for the financing behind a new home building project, a buyer has a variety of options available to them to help mitigate the various financial risks of the project itself. Specifically, because of the way in which a new home building project faces so many different possible failure outcomes as a result of poor planning, or setbacks to the project that will require additional funding, a buyer stands to benefit a great deal by taking the time to break the project down into a number of financing stages, which will limit their exposure to debts into discrete units of obligation.
The easiest way for a consumer to break down their new home construction project into discrete borrowing units is to look at the tangible aspects of property that go into the project itself, and determine how it is that they contribute to the project in terms of their lendability as collateral. For starters, we can look at the raw land underneath the property as a tangible unit of collateral that can be borrowed against independently.
This means that a buyer can finance the purchase of the raw land through debt before making an obligation to start the project itself. From there, the buyer is able to take as much time as they’d like before they start the financing agreement for the actual build itself, and can therefore make sure that they are in a position to move on the project without fear of losing the location itself to another buyer.
The second aspect of a new home construction project that should be broken apart to ensure ease of planning would be the home itself. While the construction of the home will very likely be broken into 4 main building stages during the project itself (foundation, framing, filling, finishing), the financing of the project is a single discrete aspect of the project, because of the way in which we can’t break it down into individual aspects.
As far as the bank is concerned, we need to be able to finance the entire construction all at once, or not at all. To best plan around this segment of borrowing, a buyer wants to be sure that they are able to afford the build project over however many stages are required, but also to ensure that they have access to emergency funds of approximately 1-5% of the total project cost available, just to be sure that operational setbacks don’t put the project on a hold, as a result of delays in receiving bank financing to continue the project.
The third stage of a new home construction that needs to be taken into consideration by a new home builder is the actual furnishing of the home itself. While this might sound as being a bit removed from the project of constructing the home, the way in which consumers ten d to finance their furniture purchases, and need to spend a great deal of money on their necessary accessories to make the home livable, implies that they should be budgeted for accordingly. If we can’t have access to the funds required to move into the house itself, there’s no point in building a new property (let alone buying one) if we can’t afford to move into it.
Lastly, the final stage of new home construction that a consumer needs to plan around to ensure that we are planning ahead for the entirety of the project is for the closing costs of the deal itself. This includes the legal fees, the appraisal costs, and the title registration fees of the actual move-in itself. Depending on your relationship with your bank, or the location of your property, you’ll need to generally have 1-3% of the purchase costs on hand to pay for these services.
While that might seem like a seemingly trivial amount of money, given the amount which we are financing to purchase this property), it is interesting to note how it is that many banks will not agree to finance these costs, and will insist that they be paid for with cash on hand at the time of the purchase. What’s more, they may even require proof that the customer has access to the funds required to pay for these closing costs at the time of acquisition itself. This means that a new build project that is fully planned for requires us to have access to raw-land-secured capital, mortgage funds, liquid funds for legal costs, and unsecured financing for furnishing.