How Millennials Can Affordably Build Their First Home

Owning a home is a dream for many people. For some, that means buying one that already exists. For others, they want to control every aspect of what the eventual home looks like, and that means building a custom home.

Building a home isn’t as daunting a prospect as people think—and custom homes can be surprisingly affordable. But you need to know a few things going in.

1) Choose the Right Construction Loan

Ready to own a home? When you’re building a home, you’ll need to get a construction loan. Construction loans work a little differently to regular home loans, and there are a couple of different options with different pros and cons attached.

A construction-to-permanent loan is a single loan that get converted to a mortgage after your home is complete, with all the regular mortgage options. During the construction phase, you only pay interest on the outstanding balance.

The interest rate can go up or down during construction as the Federal Reserve adjusts the prime rate, but many lenders let you lock in a maximum mortgage rate when construction begins.

Construction-to-permanent loans usually require you to put down at least 20 percent of the expected mortgage amount as a down payment, with rare exceptions. You only pay closing costs once, though, as opposed to two times for the other type of loan: the stand-alone construction loan.

Stand-alone construction loans have some advantages over construction-to-permanent, mainly if you don’t have a lot of liquid cash lying around. They can require less money as a down payment, making them easier to get.

The downsides are notable, though: you pay for two closings and two sets of fees, you can’t lock in a maximum mortgage rate, and if your financial situation changes for the worse you may find it harder to get a mortgage.

Do your due diligence first, and make sure you know how much you can afford.

Use an affordability calculator, check your credit score, make sure you have savings. Whatever option you choose will be dependent upon your personal financial situation, and there are pros and cons to each one. Choose wisely and you’ll save yourself money down the road.

2) Talk to Multiple Builders

If you get a really good sales pitch from a builder, especially if you’re impatient, it can be tempting to just jump straight in feet-first.

Resist the temptation.

Getting multiple bids from different builders will allow you to compare costs, and talking to them through the process can help you understand what’s included and what might not be.

Make sure you’re doing business with a reputable builder, and take the time to check references. Look beyond the bottom line, too. Don’t be penny wise and pound foolish—the headaches and hidden costs from working with a cheaper but more troublesome builder aren’t worth it.

3) Build Flex Into Your Budget

It’s wise to plan your budget a little under what you think you can buy. According to Extra Space Storage, “Your personal budget is one of the most important aspects of buying a new home, and the same goes for a new construction.

To ensure that your new home comes in at a reasonable final cost, we suggest starting off with a price tag that’s comfortably under budget. It’s normal for custom-built homes to come in a little over the original budget, so that extra wiggle room will give you some peace of mind should any additional costs arise.”

There are a variety of reasons for this, ranging from renovation budget changes to unforeseen issues. But regardless of the reason, you should work with a lower budget than what you can actually afford, because nothing is guaranteed to go according to plan.

While you’re comparing quotes, take a look at the details. Some homebuilders may look more expensive, but build better options into their bids. Some may look very cheap, but quote the bare minimum on materials, which can bite you later if they need more or if you decide to upgrade.

And while you’re thinking about your budget, bear in mind that you probably care less than you think about those fancy custom details. There’s a great story in this SmartAsset blog about a lady who paid thousands for fancy custom rounded corners on every wall in her home, then realized a couple of years later that she really didn’t care at all about them. She was happier about the dog door.

Don’t go overboard on custom extras that can cost way more than you think, and that you might not even care about down the road. Keep your expectations reasonable—it’s a first home, after all, and you’re still young. Your wants and needs will change down the road.

You can always remodel later—what matters is getting in and starting to build equity.

Homebuilding is expected to increase 10 percent this year, and you can be part of that number. The builder market is shifting towards middle income and starter homes. If you’ve been thinking about building over buying, now’s the time—and it’s easier and more affordable than you think.