Purchasing a house is representative of so many different things in life depending on who you ask. Buying a lot and constructing is a monstrous project requiring long-term planning. Here’s some things to consider if you’re trying to weigh out the options…
Let’s first look at the example of building home. Building a home is no easy feat. You must consider the amount of cash required for this project. Generally, to purchase land they want at least 30 percent as a down payment and the chances of getting a 30-year fixed rate for land are quite slim.
Construction costs depending on where you’re purchasing can be extraordinarily high. Moreover, you would be better served finding a lender who offers a construction loan for the purposes of acquiring and building the entire project. The other challenge that you might have is most banks only support financing for a primary residence. So, if this property is anything other than a primary home the chances of you doing this could go down or rise considerably with higher costs and a substantially larger down payment.
The process to do such a project like this, from getting permits to hiring a designer, a contractor, or an architect if necessary, could be at least one to two years in the making. Then there’s also the possibility of a change order due to going over budget.
The other alternative is to buy a piece of land and put a manufactured home on it. Sounds practical enough right because a manufactured home might cost as little as $80,000. $80k is a lot of money in comparison to say a single-family house. That is not the whole picture. The other component is the construction costs to create and build a foundation board to acquire the land and most lenders do not have financing to acquire a piece of rural land for the purposes of attaching a manufactured home to it.
In theory it sounds attractive, but in practicality this could be a very problematic situation because manufactured homes still have a stigma with banks that there are movable and subsequently riskier so once again extra cash could be needed if there was a lender that was willing to take on such a project.
Lastly, we have buying a single-family house securing residential mortgage loan financing. You can put down as little as 3- 5 percent with an affordable 30-year fixed rate mortgage and get substantially lower cost of funds making the project way more affordable from a payment standpoint.
After you close escrow on your house nothing says you can’t fix your house up over the course of time and do an addition for example or do a remodel on the house as your cash income and finances permit. Doing so could be far less expensive for 80 percent of the families who otherwise might be considering buying raw land for the intent construction.
Ultimately, it’s a large decision that should be well planned out. Do not be fooled into buying into the concept of constructing a home is less costly than an already built home, that is of course unless you already own the land.
Scott Sheldon is a local mortgage lender, with a decade of experience helping consumers purchase and refinance primary homes second homes and investment properties. Learn more at www.sonomacountymortgages.com.