Getting the construction cash you need for your building plans in advance is a condition to enjoy a continuum in the working process. Otherwise, you might experience shortages which you cannot cover immediately and thus you will be forced to halt the labor. Furthermore, a wise management of the financial funds saves you the strains and efforts of trying to fill some unexpected “gaps”.
It is unlikely to estimate exactly how much the overall construction project will cost and this is why it is advisable to get a loan. Counting only on savings is a difficult decision to make and one should do so only in the case when a financial professional has agreed with it. If you succeeded in saving enough money to cover your custom home building expenses, then it is perfect, but if not, you might end up facing serious inconveniences.
Always Have Some Extra Construction Cash
To keep the project moving, you shouldn’t limit yourself only to a construction loan, but also have extra construction cash on hand. Sure, the money that you borrow accounts for a great part of the project, but loans take time to be granted and, moreover, come with certain restrictions and requirements. Consequently, construction cash available before you ask to be lent money is very helpful to pay permits and other necessary aspects. Speaking in general terms, a custom house doesn’t imply only a construction loan, but also a surplus of construction cash in the form of as much as 40 percent of your total budget delineated for the proposed task.
Reasons to Have More Construction Cash
There are several reasons why extra construction cash is more than welcome in your enterprise, even though you have already resorted to the services of a financial institution. Among them are included:
- the need of a down payment for the land on which you intend to build your custom house – the purchase of a new terrain for your construction project is likely to require an immediate payment to close the deal ;
- the obligation to operate the loan payments or to pay taxes on your land before the construction loan is in place – in case you are not completely ready to start the building work or the loan hasn’t yet been granted but you have acquired the land;
- covering the “soft costs”, which refer to the plans, engineering, and many fees for permits before the bank’s lending agreement;
- the necessity to conclude the construction loan- when the construction cash lent by the bank might not suffice to cover the entire costs of the project. Moreover, you anyway have to prove to the financial institution that you possess money beyond what is necessary for the project in order to get qualified;
- covering the monthly costs during the construction period – although you have started the task of building your custom house, you still have to deal with property taxes, homeowners’ fees and house payments for the current residence;
- the need to fund the work between the construction draws – since the construction lender will give you loan proceeds for a particular stage of the project only if the respective task is completed, you have to be prepared to put the construction cash upfront. Thus, if a certain part is a little behind the schedule, you can provide the necessary money and later be reimbursed by the construction lender;
- the case in which you want to upgrade some items – as the work to your custom house advances, you might want to substitute or upgrade certain items like the originally specified Formica kitchen countertops with new granite ones. Since the loan is already funded and cannot be altered, you need to put the construction cash out of your pocket;
- the need to take care of unexpected problems – it would be ideally if the building project worked unobstructedly, but expect for accidents or changes of plans to occur; as Murphy’s law states, “if something can go wrong, it will go wrong.” Be it that your contractors are in the impossibility to continue their duties or extreme weather conditions hinder the continuity of the work, you have to be prepared;
- taking care of aspects that haven’t been included in the frame of the initial construction loan budget- you will definitely incur expenses related to landscaping, decorating, furnishing and moving.
Before engaging in any future building project of your custom house, you need to calculate the net worth of your current household so that you can get a good picture of your finances. Assessing the value of what is usually considered as the biggest asset one can possess, as well as the liabilities that it carries, you will be able to gain a proper perspective for making important decisions such as getting the construction cash for a custom residence. To calculate your net worth, follow the steps below:
- List all your assets with their values, including your house, cars, any cash on hand, stocks, bonds, cash-value insurance policies, or retirement money that you might have saved;
- Add up the total value of your assets;
- List all your liabilities (money that you owe), which might refer to mortgage, car loans, student loans, credit cards, and other debts;
- Sum up the total of your liabilities;
- Subtract the liability total from the asset value, the result representing the net worth.
After you have calculated your net worth, you have to compare it against the current state of affairs in real estate. To do so, follow these steps:
- Give an estimation as accurate as possible on the value of all your real estate;
- Sum up all your mortgages;
- Subtract the total of your mortgages from the total value of your real estate; the difference represents your net equity;
- Divide the net equity by the net worth.
If the result exceeds .45, it means that much of your assets are in the form of equity and you need to consult a financial adviser in order to increase your liquidity or availability of cash.
Summarizing things, a loan from a bank and some extra cash would be the “paving stones” for the start of a custom house building project. Although many are reluctant to resort to a financial institution to borrow money because they hate the idea of debt, things should go smoothly if you have the ability to pay it back.
Instead of asking an individual lender to grant you the construction cash in exchange of the promise to repay it with interest (and any other fees that you and the lender mutually agree to), you should better get the loan from a bank. The latter alternative is more convenient due to the fact that the interest rates are lower than in the former case and, moreover, you can guarantee the repayment of the construction cash through one of your assets, which is not possible in the other situation.
Securing your debt against an item of your property is like borrowing your own money out of the respective asset. Out of two clients who want to receive a loan, a bank is likely to favor the one with secured debt and liquidity (cash in the bank) than the other who has no secured debt at all.
For instance, Mr. X has paid off his home, which is worth 300,000 dollars and has other 10,000 in the bank. On the other hand, Ms. Y has a house valued at the same amount as Mr. X’s, but with a net worth structured differently. She has a mortgage for $200,000 and $320,000 in certificates of deposit and mutual funds. Although Mr. X seems a more prudent investor and more liable for the loan, it is Ms. Y who appeals more to the creditors. Why is that? Because she has ready cash available to pay back her loan if necessary.
Despite the belief that paying off one’s home is like putting money into a savings account, this is not true. Doing so, you only reduce your liquidity. Thus, you cannot withdraw cash whenever you want or move money in different deals as the market changes. Moreover, liquidity is an important factor that influences creditors in giving positive responses to your loan demands. These having been said, you need to invest wisely so that you can later reap the fruit of your efforts and use the construction cash to your advantage.