Whether building on an existing lot, finishing a newly-turned-over condo unit, or renovating an inherited ancestral house, there is nothing more exciting than creating one’s dream home. The opportunity to customize according to your specifications — from the layout of the rooms to the look of the kitchen cabinets to the design of the ceiling to the location of the electrical outlets — is the ultimate goal in home ownership.
Building an impressive home will entail a lot of work, and managing finances before it all comes to reality is equally daunting. Here are some things to keep in mind in funding your dream home:
• Know your numbers.
Most home-builders will struggle with funding their dream home to specs. Many will not have enough savings to cover the entire cost and need to take out a long-term loan to finance construction. This is different from the typical housing loan as the proceeds are released in tranches as the construction progresses.
Another advantage of getting a constuction loan is you only pay for the interest incurred during the construction period. This way, you can manage your cashflow better. Regular monthly amortization will start once construction is done. Ideally, you should allocate 50 percent of your income for monthly payments. This is the accepted threshold for borrowers of housing and construction loans. Consider this to determine how much you can afford, realistically, as your monthly amortization to know the loan amount you can borrow. This plus the savings you can set aside for constuction will determine your total budget for construction.
• Find the best lending partner.
Once you have a set budget, you can start applying for a construction loan. Try out available information and tools online such as housing loan calculators. Shop around, speak to loan officers and go for the bank that can expertly provide advice and can package your loan according to your needs and financial capability.
A good one will have a housing loan officer who can assist you not only with your financing needs but with bank loan documentary requirements and fees as well. Aside from persuading lenders of your paying capacity, you’ll need to provide a timetable, budget, and construction details to assure them of project feasibility. The bank can also give an assessment and appraisal of the costs submitted by your contractor and suppliers as added assurance of reasonableness and feasibility. Make sure you have the required documents and necessary permits.
• Work with licensed and experienced building partners.
At a minimum, you will need an architect who will create the main plan and work with other suppliers in transforming your dream home to reality. You also need a contractor who will be responsible for implementing the plan with the estimated project cost and timetable. If you wish, you may also hire an interior designer/stylist and a feng shui consultant.
Of course, you have to work within your budget. You can save on contractor fees depending on the amount of work and technical difficulty of your project. You may have to work with a general contractor, who manages the civil, structural and architectural requirements of the entire or main portion of the project; labor contractor, who will hire labor on a per day basis; and subcontractor, who will deal with specialized work such as plumbing, electrical, aluminum security, landscaping, finishing, etc. Look for the contractor with a good track record and reputation as well as the rates and the payment scheme that will fit your budget.
• Choose the right contractor and clearly define and formalize your agreement.
Determine and agree on your timelines and payment scheme with the contractor and put it in writing. There are several options you can consider, based on what the contractor offers, but, again, this is subject to your capacity and time to invest in the project:
Cost plus contract — actual cost of construction is reimbursed by the contractor.
Unit rate contract — owner pays the contractor for actual work accomplished based on an agreed-upon unit rate.
Lumpsum contract — payment is based on an agreed-upon total contract price (and not dependent on the actual cost of construction).
Design and build — contractor is in charge of everything except fixtures, furniture and equipment.
Turnkey — contract includes installation of all fixtures, furniture and equipment.
Equally important, make sure you also define exit or termination clauses. Doing this will help you avoid nightmares such as abandonment of project, or your money being stuck with a contractor you do not want to continue working with.
• Keep a tight watch on the budget and schedule of your project.
Once you start building, closely monitor the progress. Construction loans are considered higher risk than a straightforward house purchase and, therefore, have additional requirements. Time-wise, construction loans require projects that are less than 300 sqm. to be done in one year or less, and anything bigger to be completed in a year and a half. Budget-wise, you are allotted a maximum number of five fund releases and the bank will only release the next tranche of funds after checking the completion rate.
Set regular meetings on site with your architect, contractor, and suppliers to closely monitor the actual costs versus budget and track progress versus target schedule. Talk to the personnel working on your home and check for quality of work. Be mindful of materials. Make sure you get what you asked for and that wastage is kept to a minimum. If you can afford one or have a friend who is an engineer or also an architect, ask them to conduct quality control checks.
Creating your dream home can be challenging. After all, you want your home to be just as you had imagined it to be. But being better informed and having the right partners can make things easier. I certainly hope these tips can help you. Good luck and have fun!
