Special Considerations for Building a Home

What is it?

Maybe you've searched all over for the perfect home and can't find one that you like. Or perhaps you've always wanted a custom-built house that is suited to your individual tastes. Whatever the reason, you've decided to build a home and may have discovered that it is a bit more complicated than buying one that is already built.

How to do it

Choose a lot

The process begins when you purchase a lot to build on. This may not be as easy as it sounds, though. There's a lot to consider.

• Location: What type of neighborhood do you want to live in? If you have young children, are there other young families around? If you like the peace and quiet of the country, is the lot in a rural area?
• Grade: Which way does the lot's surface slope and lie? Does the lot lie lower than those surrounding it? If so, there is a good chance you could have drainage problems as water runs off neighboring properties onto yours.
• Services: Is the lot hooked up to any municipal services? City or town lots generally must be hooked up to services such as water, electricity, and gas (the cost of these hookups may or may not be included in the price of the lot). Rural lots may require the installation of a well or other water supply and a septic system.
• Zoning: Is the lot zoned properly? Make sure the lot's zoning will allow you to build the type of house you want. For example, if you are planning to build a three-story home and the zoning of the lot restricts you to two stories, you will either have to change your plans or apply for a variance from the zoning board.

Choose a floor plan

Next, you'll need to choose a floor plan. You can purchase a pre-existing floor plan or hire an architect to design one for you. Pre-existing floor plans can usually be found on the Internet, in architecture publications, or in the home improvement section of a bookstore or library.

If you plan on having an architect design your floor plan, begin your search by asking around for recommendations and by looking in the yellow pages. Once you've found several possible candidates, schedule an interview with each one. Be sure to review their work and discuss your building project. You'll also want to ask questions regarding their education, training, and experience. And don't forget to ask for references. Once you've chosen an architect, you'll need to provide him or her with specific information on your building project, such as the size and style of the home, how much you want to spend on design, the type of materials you want to use, and how much you plan to spend on construction.

Keep in mind that you'll want to choose a floor plan that suits both your financial resources and your lifestyle. Consider the basics, such as the number of bedrooms and bathrooms you want, as well as additional features, such as a home office, a garage, and so on.

Choose a builder

Of course, everyone has heard horror stories about lengthy delays, shoddy workmanship, and construction companies going out of business. And while all of these are potential problems, they can often be avoided by doing some research ahead of time. First, compile a list of builders you might want to work with. The real estate section of your newspaper is a good place to get information on builders in your area, the types of houses they build, and how much they cost. You can also contact your local homebuilders association.

Once you've narrowed down a list of builders, take a look at some of the houses that each one has built. You may want to contact the owners to ask about their experiences with the builder. Some homeowners may even let you tour their homes. If you get a chance to go inside a home, pay attention to the quality of the construction, including the cabinetry, carpeting, woodwork, and trim. And remember that although your home will be custom built for you, the builder's individual style will undoubtedly influence the finished product.

Finally, take the time to find out a little more about each builder:

• How long has the company been in business?
• How are customer service issues handled?
• Does the builder carry adequate liability and workers' compensation insurance?
• Does the builder have the proper licenses?
• Is the builder bonded?
• What type of warranty does the builder provide?
• Check with your local Better Business Bureau for more information.

Make sure you understand the terms of the sales agreement

Many homebuilders draw up their own sales agreements. As with any contract, you should understand all of the terms before you sign the agreement. Also consider having an attorney review it for you. While the terms of the agreement will vary depending on the builder, you'll want to pay attention to the following:

• Project specifications: Make sure that the contract clearly outlines the project's specifications, such as the types of building materials to be used, exact prices, and procedures to be followed if changes are made to the original plans
• Warranty language: Check the warranty language to see what defects are covered and the length of time they are covered
• Payment schedule: Look for a payment schedule that allows the final payment to be contingent upon the buyer's satisfaction with the work done
• "Drop dead date": Find out what will happen if the builder fails to meet the drop dead date (the agreed upon deadline by which the house, or phases thereof, must be completed)

Financing the construction of a new home

A construction loan is generally a short-term line of credit (3 to 12 months, depending on the anticipated duration of the construction) that you use to cover the expenses of building your home (e.g., labor and building materials). While your home is being built, you generally only pay the interest on the outstanding loan balance, which in some cases may be tax deductible. Once the construction of the home has been completed, the construction loan balance is rolled over into a mortgage, the terms of which will vary depending on the type of mortgage loan you get.

The amount of the construction loan is based on the appraised future value of the completed home and land. Many lenders will not loan more than 80 percent of this value, although you may be able to find a lender willing to lend up to 90 percent of the appraised future value. You will then be required to supply the remaining balance in cash.

Tip: Lenders often set interest rates on construction loans somewhat higher than mortgage loan rates.

Insuring your home during construction

You're going to want to make sure your home is protected during construction. One way to protect it is to purchase a standard homeowners insurance policy, which will cover any damage to your home while it's being built, along with coverage for liability and theft.

Another option is to purchase a dwelling and fire policy. You can purchase a dwelling and fire policy that only covers damage to the physical structure of your new home, or you can purchase a comprehensive policy that also provides property, liability, and theft coverage.

Tip: Once the construction of your home has been completed, be sure to re-evaluate your insurance coverage.

Caution: A homeowners policy will not cover your personal property at your new home until it is secure and lockable.